Comments on: Buying Non-Laddered CDs With Your Emergency Fund

By: Tim

Tim — Fri, 07 Nov 2008 22:15:41 +0000

we have half our e-fund in long term cd’s too, but that is because there is like 99.9999999% chance of losing job and because we have half in tax free mmf.

By: Taxrascal

Taxrascal — Fri, 07 Nov 2008 04:04:42 +0000

One trick you can try next time: if you’re breaking up $5,000 into five chunks, don’t make them equal: divide them so each chunk is half as big as the next. Since you’re dividing five times, that means your first chunk will be about $160, then $320, then $640, then $1280, then $2560.

Why? Because this maximizes the number of different amounts you can withdraw. If you divide your $5000 into equal $1000-dollar chunks, you can withdraw in $1000 increments. If you split them up this way, you can withdraw any multiple of $160.

This, of course, assumes you’re only withdrawing once.

By: Dave

Dave — Wed, 05 Nov 2008 17:29:25 +0000

Still think high dividend yields are better – especially now that they get preferential tax treatment.

By: Nick

Nick — Tue, 04 Nov 2008 01:49:52 +0000

That’s a pretty nice deal Christopher. Personally I think that CDs are a great idea as long as you have some emergency money stocked away, in a high yield savings or something similar. Then if even that’s not enough, worst case is that you cash out some of your CDs, hopefully without too much penalty.

By: Christopher Desmond

Christopher Desmond — Tue, 04 Nov 2008 01:13:27 +0000

I needed to bust up 5 CD’s at 3 banks back in 2006 for a hot investment that’s since paid off for me. When I called up penfed.org to check on the penalty, this very nice gal told me about a “CD Loan.” Worked like this: Say you have a CD that’s now, with accumulated interest, worth $100,000 and it’s yielding 5%. Assume you want that $100,000 now but there’s 2 years left on the CD. The bank will give you the $100,000 now and charge you only 5.25% (hence, net .25% interest cost to you) on the loan, which terminates in 2 years when the CD matures and the bank pays itself back out of the CD’s maturation proceeds. I had my CPA run the numbers and this way wound up cheaper than just breaking the CD and paying early liquidation penalties. Went smooth with penfed and the 2 banks. Plus one bank reported the successful loan on my credit record, thus assisting my credit score (I hadn’t borrowed any money since 1987 and have always paid off my credit card balances promptly to avoid ever paying any interest on them). Anyway, I hadn’t heard of a “CD Loan” until the penfed.org gal turned me onto it. The 2 banks were almost as reasonable with the rate, too (.25% and .32%).

By: nickel

nickel — Mon, 03 Nov 2008 19:47:58 +0000

Stacey, that’s a great feature. Of course, a ladder (once it’s completely built) would still be superior, as you wouldn’t pay a penalty on any of the money — just use the funds from whichever one has come due.

By: Stacey

Stacey — Mon, 03 Nov 2008 19:46:31 +0000

Some banks now let you cash in part of the CD early if you need to, and only penalize you for the portion you’ve cashed in. If you have a $5,000 CD and need $1,000, you pay the 3 month penalty on the $1,000.

We belong to a small, local bank in Pennsylvania. I’m not sure if larger banks do this yet, but it was a real surprise for us when we opened our latest CD. No more laddering for us!

By: frugalchick

frugalchick — Mon, 03 Nov 2008 19:34:44 +0000

Wow! This is definitely thinking outside the box. I would never consider this approach in the past but your post raised a lot of good points. I’ll be keeping an eye on long term CD rates from now on.

By: Ken

Ken — Mon, 03 Nov 2008 19:06:03 +0000

Early withdrawal penalties can vary substantially. For terms over one year, a 6-month interest penatly is the most common. But sometimes it can be the interest of half the term. If it’s a 5-year CD, that’s 30 months of interest. E*TRADE is an example of a bank that has this huge early withdrawal penalty.

By: gm

gm — Mon, 03 Nov 2008 17:04:26 +0000

I agree with the premise of the post.Also, these days when a 6 moth CD pays more than a money market account, it is often better to create a CD. For six month CDs the early withdrawal penalty is only 1 month of interest.