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Why CD laddering just isn't worth it anymore

It's tough to find an accessible place to keep an emergency fund. Here's why one man gave up on certificates of deposit -- at least for now.

By MSN Money Partner Jul 16, 2013 1:30PM
This post comes from Jim Wang at partner site Bargaineering.

bargaineering logoFor years we’ve had our emergency fund in a certificate of deposit ladder at ING Direct, now Capital One 360.

Piggy bank (© Burke/Triolo Producti/age fotostock)Then a funny thing happened a while ago (I don’t remember exactly when but it’s over a year now since all my CDs have matured), the interest rate on a savings account was higher than what you would get for a 12-month CD. If you look at yields today, the same holds true.

If you look at the rates at Capital One 360, you can get a 0.75% APY on your savings account. To beat that with a CD, you need to go to 60 months! Anything less than that and you’re better off keeping your money in a savings account.

At Ally, the rates are better but not much better. Ally will pay you 0.85% APY on a savings account and a 12-month CD is only slightly better at 0.94% APY.

Isn’t higher yield better? In theory, yes. In theory, I am better off putting the money in the CDs and letting the ladder continue because I get an additional 0.09% APY per year. The reality is that 0.09% is such a small difference I’m more comfortable with just keeping it all in cash, surrendering the difference in interest, and being happy with immediate access to my cash without penalty.

What am I doing now? Currently nothing with those funds because they’re earmarked for emergencies. It’s very tempting to want to put them in the stock market, especially given how well it has done, but that’s not what the money is for. I’m saving up for an emergency . . . that hopefully never comes. 

Unfortunately, there aren’t any safe alternatives that offer much higher yields. I don’t want to invest it because emergencies like to strike when you really don’t want to access invested funds. I don’t want to jump through all the hoops to use reward checking accounts, plus that’s not really “automated” like a CD ladder is. So for now I’m standing pat until rates increase or the difference makes enough of a difference.

There is one alternative I have considered but didn’t do. In the past, Ally has offered a 0.25% APY loyalty bonus when you renew a CD. I have considered putting my funds back into the ladder there because of the bonus. I even considered getting a three-month CD and then renewing it to a year with the higher rate plus the loyalty bonus. In the end, given the dollar amounts of the fund, it seemed like a lot of hassle to capture a couple dollars more of yield on the year.

Should you stop laddering? That’s up to you but a lot of people have stopped putting money in CDs. They’re just not worth it anymore, especially when you can get a savings account offering similar interest rates. You do surrender certainty, the interest rate on a savings account can change in an instant, but they don’t change as often as you might guess. Each bank will list their rates and an “effective date,” which is the last time they changed it. Capital One 360 hasn’t changed it since Oct. 10, 2012. Ally Bank changed it more recently (June 28) but they just list one date when they may have only changed a single rate.

Have you changed your savings strategy for your emergency fund? Still using CDs?

More from Bargaineering:

Jul 16, 2013 2:49PM
i thought the same thing, that CDs dont pay enough more than savings to justify tying up the money.  However, the rates on savings have steadily gone down over the last few years and I would have been better off to have locked into a CD back when rates were higher.
Jul 17, 2013 8:58AM
since glass-steagle was dropped, the insurance companies (state farm for me) have opened FDIC savings accounts offering more interest and services than any bank.  so i stash my cash in the insurance company's "bank"
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