MONEY: Creating a ladder

No, not the kind you use to climb to the roof of your house, but the financial kind.

With the recent shakiness in the market, someone has asked me about my blog post about CD ladders. So, here’s a sanitized version of the advice I gave him.

You might be interested in a ladder to maximize the interest your receive on the savings part of your portfolio, you might want diversification to minimize risk, or you want a flow of readily available cash without forgoing a higher interest rate.

In building a ladder, you can use certificates of deposit, treasury bills and notes, or bonds. Regardless of what you use, the principles are the same.

For sake of discussion, let’s look at a simple ladder. Here’s a four quarter four year ladder:

Year Qtr1 Qtr2 Qtr3 Qtr4  
0          
1          
2          
3          
4          

Now assuming that you have 16K$ to invest, how do you: set it up, maintain it, and shut it down.

Let’s assume you are doing this at a credit union (I love credit unions.) where they have a full spectrum of terms available and a 1k$ minimum.

You walk in on January 2nd with your 16k$ and buy A one year, two year, three year, and a four year cd for 1k$ each. You also buy a Ninety day, One Hundred Eighty day, and a Two Hundred Seventy day cd for 4k$ each.

Now your ladder looks like this.

Year Qtr1 Qtr2 Qtr3 Qtr4  
0   4 4 4  
1 1        
2 1        
3 1        
4 1        

On the first business day of each quarter, you go in and redeem your maturing 4k$ cd. They will pay you some small amount of interest. So buy a one year, two year, three year, for 1k$. And a four year cd for 1k$ plus the interest.

Now your ladder looks like this:

Year Qtr1 Qtr2 Qtr3 Qtr4  
0          
1 1 1 1 1  
2 1 1 1 1  
3 1 1 1 1  
4 1 1+ 1+ 1+  

And, you are in “maintenance” mode.

Each quarter, you go in, redeem your maturing cd, and buy a four year cd for the matured amount.

Now your ladder looks like this at the end of year 1:

Year Qtr1 Qtr2 Qtr3 Qtr4  
1          
2 1 1 1 1  
3 1 1 1 1  
4 1 1 1 1  
5 1+ 1+ 1+ 1+  

Now, to just close the ladder out, you can just take every maturing CD as they come due.

OR if you are saving a big purchase like a car or college education, you may wish to “unwind” it.

Let say at the end of year 21, you are buying a house. in Year 17 you wish to begin to “unwind” it for year 20. It’s really simple. In Year 17, instead of buying the Four Year cd, you would buy a Three Year cd. In year 18, instead of buying a Four Year cd, you would buy a Two Year cd. In Year 19, instead of buying a Four Year cd, you would buy a Two Year CD. In Year 20, instead of buying a Four Year cd, you would buy a One Year CD.

In Year 21, with the First Quarter cd, you’d roll it over into a 270 day cd. Similarly, Second Quarter would roll into a 180 day cd. Third Quarter rolls into a 90 day cd. In the Fourth Quarter of Year 21, you redeem all the cds for the new house.

That’s how a ladder works.

Why do it?

* You are always getting the highest rate of interest.

* You always have cash becoming available for emergencies.

* You are minimizing your risk of interest rate fluctuations.

What is it useful for?

* You can have your own little annuity or steady pension plan (i.e., take the interest and reinvest the principle).

* You can have an emergency fund when you need it that earns a little more interest.

* Your savings can keep pace with inflation.

# # # # #

One Response to MONEY: Creating a ladder

  1. […] savings in a CD ladder (https://reinkefaceslife.com/2007/08/17/money-creating-a-ladder/), which my wife loved, entry and exit was easy.  In today’s Fed-driven insane zero interest rate […]

Please leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: