An alternative to CD laddering - Tilted Forum Project Discussion Community

Amano · 04-05-2005, 09:18 AM

So I just received a decent chunk of money that I would like to invest, but the problem is I don't know the first thing about stocks and bonds. I won't really need access to the money anytime soon, so the best thing I can think of is CD's.

I've read all over the place about laddering CD's but someone mentioned an alternative that seems better. But being inexperienced with investing money in general, I thought I'd get your opinions.

The suggestion came when my girlfriend was looking to buy a 1 year CD. She just wanted something quick and didn't want to calculate how she would ladder multiple CD's. Anyway, the suggestion was to instead put the money in a 5 year CD (the max time her bank allows). She would earn a larger amount of interest (with the higher rate), and this would make up for the penalty she would get if she decided she needed the money before 5 years is up. We did a spreadsheet, and calculated that with a 5 year CD, and taking into consideration their penalty, she would even out in approximately 7 months.

In other words, after 7 months, the higher interest rate on 5 year CD would make up for the penalty for early withdrawal, as compared to a 1 yr CD.

So what do you guys think about that? I currently have about $4000 to invest, and I'm thinking if I buy a whole bunch of $500 5 year CD's ($500 is the minimum my bank allows), I'll earn the max interest from the very start. And say I need $1500 down the road. Then I'd only be penalized for 3 CD's worth.

Does that sound plausible?

DDDDave · 04-05-2005, 01:38 PM

In a word, yes.

Good idea.

liquidlight · 04-05-2005, 01:44 PM

I'd say that you've found a loophole, assuming that the bank doesn't have some sort of hidden processing fee or annuity that they haven't told you about.

04-05-2005, 09:18 AM	#1 (permalink)
Amano Insane	An alternative to CD laddering So I just received a decent chunk of money that I would like to invest, but the problem is I don't know the first thing about stocks and bonds. I won't really need access to the money anytime soon, so the best thing I can think of is CD's. I've read all over the place about laddering CD's but someone mentioned an alternative that seems better. But being inexperienced with investing money in general, I thought I'd get your opinions. The suggestion came when my girlfriend was looking to buy a 1 year CD. She just wanted something quick and didn't want to calculate how she would ladder multiple CD's. Anyway, the suggestion was to instead put the money in a 5 year CD (the max time her bank allows). She would earn a larger amount of interest (with the higher rate), and this would make up for the penalty she would get if she decided she needed the money before 5 years is up. We did a spreadsheet, and calculated that with a 5 year CD, and taking into consideration their penalty, she would even out in approximately 7 months. In other words, after 7 months, the higher interest rate on 5 year CD would make up for the penalty for early withdrawal, as compared to a 1 yr CD. So what do you guys think about that? I currently have about $4000 to invest, and I'm thinking if I buy a whole bunch of $500 5 year CD's ($500 is the minimum my bank allows), I'll earn the max interest from the very start. And say I need $1500 down the road. Then I'd only be penalized for 3 CD's worth. Does that sound plausible?

04-05-2005, 01:38 PM	#2 (permalink)
DDDDave Addict Location: Sarasota	In a word, yes. Good idea. __________________ I am just a simple man trying to make my way in the universe... "Go confidently in the direction of your dreams. Live the life you have imagined." - Thoreau "Nothing great was ever accomplished without enthusiasm" - Emerson

04-05-2005, 01:44 PM	#3 (permalink)
liquidlight AHH! Custom Title!! Location: The twisted warpings of my brain.	I'd say that you've found a loophole, assuming that the bank doesn't have some sort of hidden processing fee or annuity that they haven't told you about. __________________ Halfway to hell and picking up speed.