Help with CD ladder strategy for emergency fund

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Calico
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Help with CD ladder strategy for emergency fund

Post by Calico » Mon Apr 16, 2018 9:29 am

Hello all.

I currently have close to 7 months expenses saved in cash in an online savings account that earns 1% APY. For me, that's $31,000. I've been watching rates for CDs at my credit union (PenFed) and decided now might be a good time to start a CD ladder with some of that savings (to get a little more interest). But I am all over the place on how to do this and when I try to talk to family about it, they aren't much help.

I have a few things figured out, but not everything. I had to move money from the online savings to checking already because it always seems to take a week. I am not sure I want to get CDs with all that money, but that is the maximum I will invest in CDs. I figure if I don't use it all, I can just transfer the remainder back.

Here are the facts and I will follow up with my ideas.

In online savings, earning 1% APY: $31,000 (I add $800 a month to this)
Other non retirement savings: $4,000 in Schwab total stock market fund (I add $200 a month to this)
Maximum amount I am looking to put in CDs: $10,000

CD rates (APY):

6 Month - 1.65%
12 months - 2.07%
15 months - 2.12%
18 months - 2.22%
2 years - 2.33%
3 years - 2.38%
4 years - 2.43%
5 years - 2.68%

My first idea was to take $5,000 and do a 5 year CD ladder by putting $1000 in a 1 year, 2, year, 3, year, 4 year, and 5 year CD. When the 1 year CD matures, reinvest as a 5 year and down the line. Basically a classic CD ladder. Then I thought maybe I should do the same but with $2,000 in each.

Now I am wondering if I should do shorter time frames with $2,000 in each (6 month, 12 month, 15 month, 18 month, and 2 year CDs) and just let them roll over (not reinvest them for longer terms like in the classic ladder) so that in 6 months, I will have a maturing CD every 3-6 months if something happens and I am out of work.

What I am trying to decide is first: how much money should I tie up. I really want to do $10,000, but is that a mistake for what is supposed to be emergency money? I am back and forth on it because on one hand I want to access the money if I need to, but on the other hand, at 1% it's slowly losing value to inflation. And second, which is better, the classic 5 year CD ladder or a shorter one?

One other thing to consider, I continue to add to my emergency savings each month (which is why I didn't stop at 6 months). My goal is to have year of expenses saved since, while my job is pretty secure, I am still single/not in a dual income household.

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ReformedSpender
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Re: Help with CD ladder strategy for emergency fund

Post by ReformedSpender » Mon Apr 16, 2018 10:06 am

Personally, in the current environment of rising interest rates AND the intent of the ladder to be used as EM fund, I would keep duration shorter (3 yrs or less)

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Re: Help with CD ladder strategy for emergency fund

Post by indexfundfan » Mon Apr 16, 2018 10:22 am

The yield curve is pretty flat so you do not gain much by extending beyond two years. The rule of thumb is to only extend by another year if you can get another 20 basis points in interest (for taxable bonds, for munis, it is 15 bps).

For example, in extending from one-year to two-year, you get 2.33% - 2.07% = 26 basis points. But if you extend to three years, you only get 5 basis points more.

So the rule suggest to stop at 2-year. That is also why you are seeing quite a few threads talking about building 2-year ladders recently.
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Re: Help with CD ladder strategy for emergency fund

Post by indexfundfan » Mon Apr 16, 2018 10:24 am

Another point is that those rates you quoted are not the best. You can get better rates with brokered CDs or similar rates with treasury bonds which are exempted from state taxes.
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Calico
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Re: Help with CD ladder strategy for emergency fund

Post by Calico » Mon Apr 16, 2018 11:23 am

Thanks. I will do more research into shorter ladders (I haven't seen the threads about the 2 year ladders, so that's my first search). I have looked into three year ladders and will look again.

I also never heard that "rule" regarding the yield curse. That's some good stuff, thank you.

I'll be honest, I am not as sharp as a lot of the people here and I am a bit confused as to how brokered CDs work (despite reading about them). I personally won't put my money in anything I don't understand fully, so I've shied away from them. But there is no rush and I will read more. What concerns me about brokered CDs is I am not sure how the secondary market works and what it means if there is a big emergency (these are my emergency funds) and I have to withdraw early from the CDs.

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Re: Help with CD ladder strategy for emergency fund

Post by Powerfultools » Mon Apr 16, 2018 11:45 am

Calico wrote:
Mon Apr 16, 2018 11:23 am
Thanks. I will do more research into shorter ladders (I haven't seen the threads about the 2 year ladders, so that's my first search). I have looked into three year ladders and will look again.

I also never heard that "rule" regarding the yield curse. That's some good stuff, thank you.

I'll be honest, I am not as sharp as a lot of the people here and I am a bit confused as to how brokered CDs work (despite reading about them). I personally won't put my money in anything I don't understand fully, so I've shied away from them. But there is no rush and I will read more. What concerns me about brokered CDs is I am not sure how the secondary market works and what it means if there is a big emergency (these are my emergency funds) and I have to withdraw early from the CDs.
Hi Calico,

I feel the same. I am following the thread on 2-y CD
viewtopic.php?p=3871804#p3871804
I am trying to understand fully before committing too. If anybody has link(s) to help navigate and explain brokered CDs, secondary market and anything helpful in layperson, please share. I am sure many will benefit. Thanks.

Looking4Answers
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Re: Help with CD ladder strategy for emergency fund

Post by Looking4Answers » Mon Apr 16, 2018 11:49 am

I would hesitate to buy brokered CDs if there was a strong likelihood of not holding it to maturity. As for comparing CD rates, etc., you might compare not only the rates, but the early withdrawal penalties. They can vary quite a bit according to institution.

IowaFarmWife
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Re: Help with CD ladder strategy for emergency fund

Post by IowaFarmWife » Mon Apr 16, 2018 11:53 am

One thing you may want to consider is to put part of you EF into I Bonds that can be purchased through Treasury Direct. You can purchase up to 10K per social security number. The money is tied up for one year, but after 12 months they are liquid. If you cash them in before year 5, you do loose 3 months of interest, but if you have an emergency, you will have bigger things to worry about. The advantage of I Bonds over CDs is that the yield is slightly larger, and you don't have to pay any state and local taxes on them once they are cashed in, If you take them out for educational purposes, you don't have to pay the federal tax, either.

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Re: Help with CD ladder strategy for emergency fund

Post by dbr » Mon Apr 16, 2018 11:58 am

IowaFarmWife wrote:
Mon Apr 16, 2018 11:53 am
One thing you may want to consider is to put part of you EF into I Bonds that can be purchased through Treasury Direct. You can purchase up to 10K per social security number. The money is tied up for one year, but after 12 months they are liquid. If you cash them in before year 5, you do loose 3 months of interest, but if you have an emergency, you will have bigger things to worry about. The advantage of I Bonds over CDs is that the yield is slightly larger, and you don't have to pay any state and local taxes on them once they are cashed in, If you take them out for educational purposes, you don't have to pay the federal tax, either.
Indeed. And due to purchase limits if you want I bonds as part of your portfolio, emergency or not, you had best get going on it early. One consideration is that at the end of 30 years the bonds no longer accrue interest and the accumulated tax bill comes due in a lump sum. You can pay the taxes along the way though.

sbaywriter
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Re: Help with CD ladder strategy for emergency fund

Post by sbaywriter » Mon Apr 16, 2018 12:17 pm

Forget the brokered CDs - they are for people with lots of money they need to allocate to fixed income investment, not for people deciding what to do with 10k of their emergency fund. I saw in other thread there is 10k minimum required for Vanguard brokered CDs.

Yes treasury bonds and I bonds are other things you can consider, but for 10k it won't make that much difference - you could just keep it simple and go with the PenfedCDs. Maybe buy 4 at 2500 each, 6 months, 1 year, 18 months, 2 years. In 6 months/1 year you could revisit and decide whether to roll over again or go for longer maturities.

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Re: Help with CD ladder strategy for emergency fund

Post by ChinchillaWhiplash » Mon Apr 16, 2018 12:43 pm

You could always split it between CD ladder and high interest online savings for more liquidity. AMEX, for example has no fee, no minimum balance, 6 transfers a month, with 1.55% APY. Something to think about at least.

SeekingAPlan
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Re: Help with CD ladder strategy for emergency fund

Post by SeekingAPlan » Mon Apr 16, 2018 12:51 pm

I would not use brokered CDs as they are not liquid enough for an emergency fund.

Check into t-bills from Treasury Direct (minimum $500) or Fidelity (minimum $1000). The terms are 4, 13, 26 or 52 weeks and they are easy to sell if necessary.

Looking4Answers
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Re: Help with CD ladder strategy for emergency fund

Post by Looking4Answers » Mon Apr 16, 2018 12:54 pm

SeekingAPlan wrote:
Mon Apr 16, 2018 12:51 pm
I would not use brokered CDs as they are not liquid enough for an emergency fund.

Check into t-bills from Treasury Direct (minimum $500) or Fidelity (minimum $1000). The terms are 4, 13, 26 or 52 weeks and they are easy to sell if necessary.
I have read similar statements on other posts. I have no experience with t-bills. If selling at Fidelity, is it a matter of just hitting a "sell" button?

mega317
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Re: Help with CD ladder strategy for emergency fund

Post by mega317 » Mon Apr 16, 2018 12:59 pm

Can we just put this in perspective that you are talking about a difference of no more than 2.68%, minus 1%, times 10k = 168 taxable dollars a year

Austintatious
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Re: Help with CD ladder strategy for emergency fund

Post by Austintatious » Mon Apr 16, 2018 1:01 pm

Considering that this money is for unforeseen emergencies and presumably intended to be relatively liquid, I agree with the suggestions to stay with the shorter term certificates, especially since the rates offered for the longer terms are really not so great. DW opted for some of those 5 year certificates at 3% that PenFed offered a few years ago but I don't think I'd jump at 3% for 5 years right now, since I'm so sure that much better rates are just around the corner. :wink:

Also as pointed out earlier and if you want to deal with another institution, there certainly are better rates out there than what PenFed is currently offering. A good listing of current rates can be found here:

[urlhttps://www.bankrate.com/cd.aspx#testid=10560704816_a][/url]

As also mentioned above, consider and compare the early withdrawal penalties and other terms/fees. Typically, the penalties for early withdrawal of the shorter term certificates are less onerous than those with longer terms.

Then there's your option, if only for the near term, of just placing your money in a high yield savings account. There are a number of offerings out there with rates pretty darned close to ( a few even better than) those you'd earn with the shorter term certificates at PenFed you mentioned. And with this option, your money would not be tied up for even a short term. You can find a good listing of the high yield savings options available the the same bankrate.com site mentioned above.

SeekingAPlan
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Re: Help with CD ladder strategy for emergency fund

Post by SeekingAPlan » Mon Apr 16, 2018 6:24 pm

Looking4Answers wrote:
Mon Apr 16, 2018 12:54 pm
SeekingAPlan wrote:
Mon Apr 16, 2018 12:51 pm
I would not use brokered CDs as they are not liquid enough for an emergency fund.

Check into t-bills from Treasury Direct (minimum $500) or Fidelity (minimum $1000). The terms are 4, 13, 26 or 52 weeks and they are easy to sell if necessary.
I have read similar statements on other posts. I have no experience with t-bills. If selling at Fidelity, is it a matter of just hitting a "sell" button?
Pretty much.

Here is what Fidelity says about liquidity:

"Liquidity
Large volumes of Treasuries are bought and sold throughout the day by a wide range of institutions, foreign governments, and individual investors so they are considered to be highly liquid. Investors considering Treasury securities have opportunities to buy bonds both at regularly scheduled auctions (see Auction Schedule) and in the secondary market, which is one of the world's most actively traded markets. Investors can find Treasury bills, notes, and bonds posted with active bids and offers. Spreads (the difference in price between the bid and offer) are among the most narrow available in the bond market. Investors should, however, be aware that at certain times, such as when important economic data is released, Treasury securities can be at their most volatile."

https://www.fidelity.com/fixed-income-b ... sury-bonds

TheTurtle
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Re: Help with CD ladder strategy for emergency fund

Post by TheTurtle » Mon Apr 16, 2018 7:21 pm

Hi Calico,

I've done something similar, starting two years ago. I bought into a CD ladder (direct not brokered), going from 1year to 5years in January. Then I repeated in April, July and October. This gave me a ladder with many rungs, one rung maturing every quarter. I put every maturing rung into a new 5 year CD, which generally gives me the best rate. If I can, I bump up the principal every time I turn over. I started with 500 dollar cds. Now some of them have 2000 each. Total is just about 14000.

Many would say this is too complicated. It might be,I'll admit it. What I do want is a rolling structure that will keep growing over the years. Splitting up the ladder means I'm never tying up too many funds in one instrument. If I ever need to break, I shall break the CD closest to maturity. It also keeps some fixed income, taxable (and therefore more accessible) funds.
As my income grows or savings increase, I plan go on increasing the $/rung in a perpetually rolling ladder.
Something like this, or slightly simpler might be more useful for the sums we are talking about. :sharebeer

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Re: Help with CD ladder strategy for emergency fund

Post by Kevin M » Mon Apr 16, 2018 8:29 pm

Calico wrote:
Mon Apr 16, 2018 9:29 am
Hello all.

I currently have close to 7 months expenses saved in cash in an online savings account that earns 1% APY.
This is a horrible rate. There is a savings account now that is paying 2%, and even Vanguard Prime money market is paying 1.77%. It would be useful to know your federal and state marginal tax rates, as a muni money market fund could have even higher taxable-equivalent yield. California muni MM fund as a TEY of 2.09% for me, so that's now where I'm parking excess cash.
For me, that's $31,000. I've been watching rates for CDs at my credit union (PenFed) and decided now might be a good time to start a CD ladder with some of that savings (to get a little more interest). But I am all over the place on how to do this and when I try to talk to family about it, they aren't much help.
PenFed has not offered competitive CD rates in some years now, and they don't now. For 2-year and 3-year maturities, brokered CDs are offering 2.65% and 2.85% respectively. However, as others have mentioned, CDs are not great for an EF, as your return can be negatively impacted if you must sell before maturity. This is true for brokered or direct CDs, and although direct CDs can be better if the early withdrawal penalty is low enough, at shorter maturities is unlikely to make much difference unless rates increase a lot.

It's true that Treasuries are much more liquid, but you can still lose money or get a lower return than expected if you must sell before maturity and yields have increased.
I have a few things figured out, but not everything. I had to move money from the online savings to checking already because it always seems to take a week.

You have a bad setup. I can move money from Ally savings at 1.45% to Ally checking instantly, and I can move money from a Vanguard money market to Ally in one or two business days.
Here are the facts and I will follow up with my ideas.

In online savings, earning 1% APY: $31,000 (I add $800 a month to this)
Other non retirement savings: $4,000 in Schwab total stock market fund (I add $200 a month to this)
Maximum amount I am looking to put in CDs: $10,000
Is the $10K in addition to your $31K emergency fund? If so, what is the purpose, and what is the shortest time period you might possibly want to tap it?

As others have said, Treasuries can beat CDs in a taxable account if you pay state income tax. For example, for me, a 1-year Treasury has a TEY of about 2.4%, while a 1-year new-issue brokered CD pays 2.1%. So I would favor the Treasury over the CD, but today I bought a 1.3-year AAA CA muni with TEY of about 2.6%, so even better. This isn't for an EF, but for a ladder to meet residual living expenses; due to relatively high bid/ask spreads as well as some term risk, I wouldn't buy a 1-year muni or CD for an EF, and probably not a 1-year Treasury either.

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Re: Help with CD ladder strategy for emergency fund

Post by Kevin M » Mon Apr 16, 2018 8:37 pm

sbaywriter wrote:
Mon Apr 16, 2018 12:17 pm
I saw in other thread there is 10k minimum required for Vanguard brokered CDs.

The $10K minimum is for the new-issue CDs currently available at Vanguard and Fidelity--not sure if this is always the case. You can buy smaller quantities on the secondary market, and sometimes the highest yields are for the smallest quantities, like 1 to 5 (quantity 1 = $1,000 face value). At Vanguard with smaller accounts, the $2 per CD commission is likely to make the net yield not as attractive as the best new issue, but sometimes it can be (I found one a few days ago). With the $1 per CD commission at Fidelity even for small accounts, you can often match or beat the best new-issue yields, even for small quantities.

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Re: Help with CD ladder strategy for emergency fund

Post by lotusflower » Mon Apr 16, 2018 8:45 pm

I'm interested in the same kind of thing. But I've never understood why people want to put EF money in multi-year CDs. I want the money to be able to flow out over a 6-month period to meet living expenses, so from that perspective the ideal would be a ladder of 6 6-month CDs. Unfortunately the rates on that are not competitive with a Capital One money market account so that's where my funds are now.

I am interested in slowly building a ladder of US Series I Bonds, slowly because I don't want too much tied up in the one-year holding period at any one time. Lots of older posts seem to say this is a good place for EF money, but the concern I have is that if rates go up substantially, then the fixed-rate portion of the bond may no longer be competitive and I'd want to roll them into new bonds, and then each rollover would be inaccessible for another year. I can deal with the one-year wait at startup but wouldn't want to keep repeating that.

Alternatively I could buy 26-week T-bills, or a ladder of 12 one-year CDs and accept some penalty if I every use them before maturity but neither of those options seems that much better than a simple money market account with a good rate. Any thoughts?

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Re: Help with CD ladder strategy for emergency fund

Post by peterinjapan » Mon Apr 16, 2018 9:09 pm

Fidelity's brokered CDs are up to 2.65 for the 2 year, I'm still hemming and hawing about whether I want to build a ladder of these.

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Re: Help with CD ladder strategy for emergency fund

Post by Kevin M » Mon Apr 16, 2018 9:10 pm

lotusflower wrote:
Mon Apr 16, 2018 8:45 pm
Unfortunately the rates on that are not competitive with a Capital One money market account so that's where my funds are now.
1.50% for >$10K? Please see my earlier reply for better options.
Alternatively I could buy 26-week T-bills, or a ladder of 12 one-year CDs and accept some penalty if I every use them before maturity but neither of those options seems that much better than a simple money market account with a good rate. Any thoughts?
It depends on your marginal tax rates, and whether or not you itemize deductions and deduct state sales tax. For me, a 6-month Treasury is about a tie with CA muni MM in term of TEY, so I wouldn't bother with the Treasury. A 6-month CD is even less, so no contest--CA muni MM unless I extend maturity to one year, and in taxable I would go with a AAA muni, but not for an EF. TEY for a 1-year Treasury for me is 2.37%, so almost 30 bps more than the MM fund, but I don't know that I'd want to take the term risk for an EF--you could easily lose more than 30 bps if you had to sell the Treasury in six months and the 6-month Treasury yield had risen enough.

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Re: Help with CD ladder strategy for emergency fund

Post by Kevin M » Mon Apr 16, 2018 9:13 pm

peterinjapan wrote:
Mon Apr 16, 2018 9:09 pm
Fidelity's brokered CDs are up to 2.65 for the 2 year, I'm still hemming and hawing about whether I want to build a ladder of these.
For what purpose? You can't build a ladder with a single maturity.

Having said that, 2-year maturity is pretty much the sweet spot of the CD yield curve. You get about 55 bps for extending from 1-year to 2-year, but only 20 bps from extending from 2-year to 3-year. Beyond 3-year you only get about 7 bps per year for extending from 3-year to 5-year.

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shess
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Re: Help with CD ladder strategy for emergency fund

Post by shess » Tue Apr 17, 2018 12:59 am

mega317 wrote:
Mon Apr 16, 2018 12:59 pm
Can we just put this in perspective that you are talking about a difference of no more than 2.68%, minus 1%, times 10k = 168 taxable dollars a year
Yes yes yes. It might feel like it's a "free" $168, but based on the thread, I'm not going to call it quite _that_ free!

While 1% is certainly better than your corner B&M bank would probably give, it's easy to do better with an online savings account. Putting that money with someone like Ally or Penfed (or Alliant or Discover) who has consistently strong savings rates over time is about as close to free money as you'll get.

Something to consider when designing your ladder is that there is no perfection - an emergency fund is for emergencies, which by definition are outside of your control. Otherwise they wouldn't be an emergency! So IMHO thoughts like "maturing CD every 3-6 months" are of dubious utility. Don't get me wrong, it SOUNDS good, but realistically your likely outcomes are "Never dip into the emergency fund" and "Liquidate the majority of the fund". In my experience people prudent enough to setup a legit emergency fund often have a lower occurrence of unforced emergencies in the first place. Anyhow, where I'm going here is consider whether you're actually likely to get value from slicing your $31k into 20 quarterly tranches spread across 5 years, or could you get by with 5 rolling 5-year CDs, or even 3 rolling 3-year CDs? Consider whether there's a minimum amount you'd be willing to dip in for, kind of like a deductible, and don't bother designing to make anything less than that easy.

Since you don't currently have a ladder, another thing to consider is whether you'll be happy with a ladder. I set one up, then found that I just wasn't convinced it provided enough value over a high-yield savings account to be worthwhile (my income and expenses have been somewhat variable the past few years). I was spending a lot of time worrying about whether the ladder was right, but my worry wasn't improving outcomes. So I think starting with a 2-year ladder and bumping it up over time is a completely reasonable approach. It gets you rolling so you can figure out how things feel, and in the long term it's not going to lose you much.

Also, an emergency fund is not a place to worry too much about losing value to inflation. If you're doing it right, your emergency fund will grow to cover inflation and a bit of standard-of-living inflation, which should over the years be a smaller and smaller portion of your overall assets. Think of it like a form of insurance, rather than as a lazy part of your portfolio, it's not _supposed_ to earn anything.

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Re: Help with CD ladder strategy for emergency fund

Post by mega317 » Tue Apr 17, 2018 8:28 am

shess wrote:
Tue Apr 17, 2018 12:59 am
realistically your likely outcomes are "Never dip into the emergency fund" and "Liquidate the majority of the fund".
Good post, which I agree with except for this specific sentence. The most like scenario, for someone who needs an emergency fund and maintains a certain number of months expense, is to use a part of it. If you keep 6 months, you certainly won't need all of it at once.

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Re: Help with CD ladder strategy for emergency fund

Post by Calico » Tue Apr 17, 2018 8:56 am

Wow! I came with what I though was a simple question and got a wealth of advice and other options I didn't consider. Thank you everyone for your input on this. You've given me a lot to mull over.

My plan was to go to the brick and mortar PenFed this weekend, but now I don't know it I will do that (well, I still need to go. My 14-year-old daughter asked me to take $1,000 from her personal savings account and put it in a one-year CD). In the meantime, it used to take 3-4 days for a transfer from my online bank to my brick and mortar checking account, but it happened in a day. So at least that's already better.

Just to be clear (and answer some questions). My thought process on this is as follows I have 7 months expenses saved (well, just under 7 months). The total amount I have is $31,000 and I plan to take $10,000 of that and invest it differently. That would leave $21,000 in the emergency fund which is about five months living expenses. I am also adding $800 a month to the emergency fund. So it's going to slowly go back up over time (barring emergency of course). In looking at some of the links in this thread, I did find an online account that I could easily use that offers 1.5% (better than the 1% I get now). So that's an option too instead of CDs.

I know that I am not talking about a lot of money to most people, but this is a lot of money for me. And even if the different in interest is just a little bit, I think like "why not maximize it as much as I can?"

Thanks again!

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Re: Help with CD ladder strategy for emergency fund

Post by shess » Tue Apr 17, 2018 12:57 pm

mega317 wrote:
Tue Apr 17, 2018 8:28 am
shess wrote:
Tue Apr 17, 2018 12:59 am
realistically your likely outcomes are "Never dip into the emergency fund" and "Liquidate the majority of the fund".
Good post, which I agree with except for this specific sentence. The most like scenario, for someone who needs an emergency fund and maintains a certain number of months expense, is to use a part of it. If you keep 6 months, you certainly won't need all of it at once.
Yeah, OK, maybe I should walk that back or color it some.

There's some amount which you're unlikely to dip into your emergency fund for, which is going to vary by person. For instance, OP suggested they were setting aside $800/mo, so after accounting for the ability to smooth expenses out with a credit card, I think it's unlikely that they would dip into their emergency fund for much less $1500 (again, that will vary per person). So I don't think it would really make sense to layout your CD ladder aiming to cover something in that kind of range, because you probably wouldn't even use it in that case.

Put more generally, consider your personality, and consider what you would consider the right magnitude worth dipping into your reserve fund. If you wouldn't dip in for a $1000 problem, then having $250 mature every month is probably not too useful for you.

In thinking about my earlier response, I do want to work in support for a CD ladder for this type of thing, or other somewhat-illiquid accounts like iBonds. My reasoning is that sometimes you need a little friction in the works to help support your goals. If you're the kind of person who puts off necessary dental work for 9 months while saving up, it probably doesn't matter how you store things. But if you're the kind of person who sees their neighbor get a 4-wheel ATV and develops an immediate craving, well, maybe it's best to have a little friction in the loop. A CD ladder is fairly liquid, but early redemption is certainly a bit more of a bump than withdrawing from a savings account!

[That's why I mentioned iBonds, I have left about half my emergency funds in iBonds. Most of my position is 10 years old, so they have decent rates and no withdrawal penalties, so I'll try hard to make things work before touching those iBonds! That may not apply to iBonds purchased _today_, but the strategy of appropriately gauging your commitment level still applies.]

Austintatious
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Re: Help with CD ladder strategy for emergency fund

Post by Austintatious » Tue Apr 17, 2018 1:22 pm

OP, first off, I'll say that 31k, even just the 10k you're thinking of investing in CDs, really is a "lot of money to most people" and is worthy of serious consideration.

I see nothing at all wrong with placing that 10k into CDs, if that's what you want to do. You'd be required to keep up with the maturity dates, do your research, decide and interact with the institution(s) regarding what happens next. That may not seem like much but those experiences are calculated to make you a better informed and more capable investor. In other words, there's more value in the experience than just the maximizing of gains.

Then there's the entertainment value of it all, which is no small thing. Seriously. Just think of what goes on here on the forum, like right now. The research, the discussion, the contemplation and the decision making, all of becomes a form of personal entertainment for many, a very large part why so many spend so much time here, I submit.

Because rates have bumped a bit and we think that's likely to continue, DW and I have been kicking around the idea of more CDs and maybe a ladder. That's why I looked in on your post. I've concluded that staying short term until the longer CD rates go up would be the better bet. Then again, as long as high yield saving accounts are staying competitive with the shorter CD rates, the savings account would be a lot simpler.

Again, the early withdrawal penalties and other fees and terms of the various institutions, which can vary significantly, are better known up front and ought to be part of the consideration.

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Nestegg_User
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Re: Help with CD ladder strategy for emergency fund

Post by Nestegg_User » Tue Apr 17, 2018 2:18 pm

as noted by earlier posters, it’s really not advantageous to go beyond 2 year CD’s at this time. I would break up your CD’s into segments: $5 k into 2 year CD every six months, while keeping the rest in higher savings account. That way if you need to “break” a CD it doesn’t affect the rest... need $4k ==> break only one of the CD’s leaving the rest of the $15 k. ( you also ride the wave of increasing rates as they go up as they mature)

inbox788
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Re: Help with CD ladder strategy for emergency fund

Post by inbox788 » Tue Apr 17, 2018 2:29 pm

With regular savings and money market accounts yielding 1.5-2%, you can put the entire amount there without tying it up until you decide what to do that's a lot better or CD rates rise. Or begin by putting 1/3 or 1/2 in a 2 year CD at 2.6%

https://www.bankrate.com/banking/savings/rates/

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DaftInvestor
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Re: Help with CD ladder strategy for emergency fund

Post by DaftInvestor » Tue Apr 17, 2018 2:36 pm

1-Year CD rate: 2.07%
High-Yield Savings (Marcus, etc.): 1.6%
Additional yield for your $10,000: $47.
Maybe skip a meal out ($47) and save yourself the trouble :)

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Re: Help with CD ladder strategy for emergency fund

Post by SpaethCo » Tue Apr 17, 2018 3:00 pm

Please note that Penfed made their early withdrawal penalties more severe.
h. Early Withdrawal Penalties.
All requests for early withdrawal must be in writing. In the event of early withdrawal, one of the following penalties shall apply:
1) Six-month Money Market Certificates.
a) If redeemed within 90 days of the issue date or any renewal date, all dividends will be forfeited. b) If redeemed thereafter, but prior to the maturity date, dividends for 90 days will be forfeited.
2) Certificates Having a Term Greater Than Six Months.
a) If redeemed within the first year, all dividends will be forfeited.
b) If redeemed thereafter, but prior to the maturity date, the early withdrawal penalty will equal 30% of what would have been earned if the certificate had been held to maturity, not to exceed total dividends earned
3) Exceptions. The penalties described above will not be applied if the redemption is made:
a) Subsequent to the death of any holder of the certificate;
b) As a result of the voluntary or involuntary liquidation of the credit union.
Source: https://www.penfed.org/content/dam/penf ... cation.pdf

If you get a 1 year certificate and redeem it at 364 days, you lose all interest.

For an emergency fund where there exists the possibility you might have to do an early withdrawal, choose a financial institution with less severe penalties.

Austintatious
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Re: Help with CD ladder strategy for emergency fund

Post by Austintatious » Tue Apr 17, 2018 3:30 pm

Here, for example, are the current CD rates for Live Oak Bank. I think their rates for short term CDs are very good, especially that 6 month rate of 1.95%. The linked page also discusses the early withdrawal penalties and
it's 90 days simple interest for CDs with terms less than 24 months.

Their current high yield savings rate is 1.7%. Their fee structure seems to be one of least onerous I've seen. I have had no dealings with this bank.

https://www.liveoakbank.com/personal-ba ... -cd/#Rates

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Kevin M
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Re: Help with CD ladder strategy for emergency fund

Post by Kevin M » Tue Apr 17, 2018 3:58 pm

Austintatious wrote:
Tue Apr 17, 2018 3:30 pm
Here, for example, are the current CD rates for Live Oak Bank. I think their rates for short term CDs are very good, especially that 6 month rate of 1.95%. The linked page also discusses the early withdrawal penalties and
it's 90 days simple interest for CDs with terms less than 24 months.
That's among the top three 6-month CD rates show at DepositAccounts.com, so yes, it's good as far as direct CDs go. But you can get about the same rate in a 6-month Treasury, and if you pay state income tax, the Treasury rate is higher after adjusting for taxes.
Their current high yield savings rate is 1.7%. Their fee structure seems to be one of least onerous I've seen. I have had no dealings with this bank.
If you're going to mess around opening a new bank account, why not use Popular Direct to earn 2.00% APY--the top rate listed at https://www.depositaccounts.com/savings/. This is even higher than the 6-month CD at 1.95%, and although your TEY with a 6-month Treasury might be a bit higher, you have more liquidity and no term risk with the savings account--better for an EF.

Kevin
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DaftInvestor
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Re: Help with CD ladder strategy for emergency fund

Post by DaftInvestor » Tue Apr 17, 2018 4:17 pm

OP:
In case you haven't considered an alternative - Another popular option discussed here would be to create your second emergency tier using an iBond.
Buy a $10,000 iBond - you can cash (with 3 month interest penalty) after 1-year (no penalty after 5 years) - it will always stay on par with inflation (e.g. currently pays 2.48%).
Of course maybe you already buy these...

Austintatious
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Re: Help with CD ladder strategy for emergency fund

Post by Austintatious » Tue Apr 17, 2018 4:46 pm

@ Kevin

Yes, the Popular Direct rate at 2% is the best I've seen recently, as well, but I was turned off by their fee structure. I see a fee structure like that at Live Oak as notably more customer friendly. Plus there's no minimum deposit at Live Oak while Popular requires a 5k minimum.

As for high yield savings v. CDs, I've been under the impression that the rates offered for the savings accounts are subject to change at any time, perhaps unlikely to take a dive over the short term but certainly possible, while the CD rates which would be guaranteed.

Both of those things would make a difference to me.

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Kevin M
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Re: Help with CD ladder strategy for emergency fund

Post by Kevin M » Tue Apr 17, 2018 5:19 pm

Austintatious wrote:
Tue Apr 17, 2018 4:46 pm
@ Kevin

Yes, the Popular Direct rate at 2% is the best I've seen recently, as well, but I was turned off by their fee structure. I see a fee structure like that at Live Oak as notably more customer friendly. Plus there's no minimum deposit at Live Oak while Popular requires a 5k minimum.
Fair enough, but let's get clear on the details. From what I see at DA, although minimum to open account is $5K, minimum to avoid the $4 monthly fee is only $500. For someone looking at $10K, as is OP, this should not be an issue.

I would still look at money market funds, especially for those who already have a Vanguard account. Prime MM is 1.77%. Also evaluate the taxable-equivalent yield (TEY) of muni money market funds. TEY of CA muni MM now is 2.15% for me (has been climbing daily). Although minimum to open a VG MM fund is $3K, you can let balance fall close to $0 and keep the fund open.
As for high yield savings v. CDs, I've been under the impression that the rates offered for the savings accounts are subject to change at any time, perhaps unlikely to take a dive over the short term but certainly possible, while the CD rates which would be guaranteed.
Also a fair point. There is no term risk for savings or money market, but the flip side of that is that rates can go down as well as up. Rates have been rising pretty steadily, so I prefer a higher rate with less (or no) term risk. I just depends on which risks you are more willing to take I guess. Someone else might be more concerned about inflation risk, so an I Bond might be preferable to them (as long as they are OK with the 1-year initial lockup).

If using a CD for an EF, you're probably going to lose something if you need to tap it before maturity. For direct CD, you pay the EWP. For brokered, you might pay 0.5% for bid/ask spread, and you will lose more if rates have risen. Treasuries have much lower bid/ask, and you might get higher TEY than with a CD, but you still can lose if you need to tap early and yields have risen.

Also keep in mind that it's pretty easy to move cash around. I was holding excess cash in 11-month no-penalty CDs at ally at 1.75% (now 1.50%), but I did early withdrawals from those when Prime MM and TEY of CA MM fund were both above that, and on the same day bought VG CA muni MM fund with most of the proceeds.

Kevin
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