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Options to CD Laddering that can provide a good return on your money.
CD or Certificate of Deposits are FDIC insured instruments for short term investing. They allow you to lock up your money for 3 months to 6 years in exchange of a fixed interest rates. Although some banks offer variable rates CDs, generally these earn a fixed rate.
CD laddering or staggering are terms used to describe an investment style using CDs. Basically, you invest different sums of money with varying maturities dates. The money earns a return via a locked interest rate.
There is very little risk when CD laddering. Typically, these are insured by the FDIC at the bank where you make your deposits. The insurance, like saving accounts, is up to $250,000 per person. Because there is little risk, these investments don’t generate a lot of return.
Uses for a CD Laddering
People use CD laddering for short term investments because they plan to use the funds shortly. Some people put their emergency fund’s money on a CD ladder. Savings for a down payment on real estate can be placed on a CD ladder. Also, for people who don’t want to place their money on the stock market, a CD ladder can be an appropriate vehicle.
If you decide on a CD or High Yield Savings account to place your money, CIT Bank offers very competitive rates. CIT is a member of the FDIC, so your deposit is insured.
Although a CD Ladder can be used for the purposes above, there are other short term instruments that can earn a better return than a CD ladder. These instruments may experience some fluctuations and have more risk than CDs. In return for some risk, you can earn more interest/return.
Alternatives to CD Laddering
There are some options to invest your money for short term and earn interest and dividends. These options are all related to market investing, therefore you won’t have the security of FDIC insurance. However, these alternatives are relatively low risk and in some cases will give you a return higher than CDs.
One advantage these instruments have over CDs is that your money is not locked up. But, the main difference is that there will be some market risk. So, you may get higher reward/return in exchange for more risk.
Your goals – decide on your goals for investing on a CD Laddering. If you really need to lock up your money, need insurance and are happy with the interest rate, go ahead with the CDs. But, if you are flexible consider these ideas.
What you need to think about when evaluating alternatives to CD Ladders
- Your short/long term goals (needs)
- Liquidity of the alternatives
- Your risk appetite
- Your time horizon
Money Market Account vs CD Ladder
Money markets are financial instruments with high liquidity and short term maturities. You can invest in them at banks and also at mutual funds and brokerage companies.
Need your money?
A money market account is liquid. You aren’t tied up to a fixed term
Want return on your money?
A money market can earn you more than regular savings or CDs.
Some of the money market accounts are FDIC insured, just check with your bank or broker.
Ok, so you’re ready and convinced. Where do you invest in Money Market.
Here are my favorite places to invest in a money market or any other instrument.
Vanguard is my favorite because of it’s very low fees and mutual and index funds varieties. Fidelity and Schwab are good choices too. For example, Vanguard offers two Money Markets, a Federal money market and a Prime money market. Both options look to provide income and preserve capital, these are taxable accounts.
Currently, money markets rates are close to CDs rates, but you don’t lock your money up. You do run some risks.
US Bonds Mutual Fund vs CD Ladder
For people who don’t mind getting a little riskier, the US Treasury securities funds provide income with low risks. You can cash out your money at any time or set up a time frame on your own, like 6 months or 1 year.
Sticking with Vanguard, but you can also find this asset class at other brokerage houses, consider the agencies funds. My two favorites are the TIPS, Treasury Inflation Protection securities and the Long term bond.
These two funds invest in agencies and US government backed securities. The goal is to provide income with little volatility. These funds or ETFs are not insured, just the securities they invest in are government backed.
Tax Exempt Municipal Fund vs CD Ladder
Going further on the risk spectrum, tax exempt municipal funds offer income at a higher risk level. These funds invest in state bond issues. States like California, New York and Massachusetts are among the most popular.
The funds invest in municipal bond offerings from a state, also known as Munis. The underlying securities are tax exempt from state taxes, which makes it more appealing to high tax bracket investors. These funds earn a higher return than CDs, but also you incur higher risks.
The Bottom Line
I’m not advocating against investing in CD laddering. I’m just recommending to look at other instruments that although not insured, can give you a better return for some risk.
As you can see, there are other short term ways for investing your money and earning income, besides CDs. I understand some of you like CDs for safety and a locked rate. However, if you can’t stomach the risks that comes with the alternatives above, than CDs are fine.
CIT Bank has CD options that are no-penalty CDs. If you decide that it’s best to place your money temporarily on an insured account, explore some of the options.
Review the options and consider them before locking your money away for some time. If you have a lot of money to invest, then you definitely should look at alternatives to CDs laddering. Remember to invest informed.