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I understand that CD ladders are a mechanism to take advantage of the various interest rates offered for different time periods. Given that, is there any point investing in longer and longer term CD's unless the APY is (at least slightly) higher each time?

Marcus (Goldman Sachs) offers the same return (1.0%) for the 4-year CD as it does for the 3-year, 2-year, and 1-year. Is this why shopping around is important for CD's? I see that another bank, ManhattanLife (never heard of it) is offering 2.60% for their 3-year term. I would have liked, purely for convenience, to hold all of my CDs at the same bank, but is being creative and using different banks a necessary part of a successful CD ladder?

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    Let's face it: 2.6% isn't anything to get excited over. You aren't buying CDs in a concerted effort to grow your money; you are trying to get a decent return to offset inflation while maintaining liquidity. IMO, the mental overhead of managing accounts at multiple banks would not be worth the difference between 1% and 2.6%. If I were set on using Marcus, I would put the money into one (or more, for ease of later laddering) 1-year CD to wait for the long-term rates to rise. – chepner Jul 28 '20 at 13:49
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    If your ladder were already established, you wouldn't really care if all the CDs had the same rate; your money would already be spread across multiple long-term CDs with staggered maturity dates. – chepner Jul 28 '20 at 13:51
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    It depends on the value of your time and the value received for your time. The difference b/t the two rates is 1.6% which doesn't amount to much on a $5k CD but for say a $100k CD, it's more significant ($1,600). For $1,600, the 15 minutes of time to open the CD would be worth the effort. – Bob Baerker Jul 28 '20 at 14:09
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Another reason to invest in longer term CDs is to hedge against rates going down in the future. There might not be much difference in a 3 year and a 4 year in terms of rate but in 3 years that CD purchase could look like a great move (or bad move depending on what happens with rates).

Also, unless you have a specific reason to stick with one financial institution, it would only make sense to rate shop a product like this as it takes very little to establish/maintain.

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This all depends on the goal of your ladder and a bit of looking into the "crystal bll". Basically the banks think that interest rates will be lower in the future so they are not looking to pay more for longer term CDs. Currently, where I see this, is in the shorter term CDs. All the 3, 6, 9, and 12 month CDs are all paying the same (.15%).

The assumption of the CD ladder theory is that longer term CDs always pay more. Obviously that is not the case currently and requires some examination of your goals and outlook of the economy.

This is very opinion based, but I have been buying only shorter term CDs. You have to make your own decision. Keep in mind that your decision may not be optimal. We tend to beat ourselves up for sub-optimal decisions (at least I do). However, you should take comfort in the fact you are using your hard earned money to make more money.

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    Thank you, @Pete B. You mentioned currently only buying shorter term CDs. Is this because you want to have access to your money in case the CD offer higher rates in the future? – 286642 Jul 28 '20 at 14:24
  • @286642 I just cannot see tying up my money for longer periods of time at the same interest rate. Given the rates are so low, it just does not make sense to me. Also I am not keen on the future economic outlook so am currently holding a lot of cash. – Pete B. Jul 28 '20 at 15:28
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One reason for using a CD ladder is to stagger the maturity dates over the year. When starting out it is typical to buy CDs of differing lengths but the same start date. Then as each of the shorter ones matures roll them over to a longer CD.

For example:

  1. Buy a 3 month, 6 month, 9 month, 12 month CD
  2. Approximately 90 days later as the first CD matures buy a 12 month CD
  3. Approximately 90 days after that use the funds from the 2nd CD to buy a 12 month CD.
  4. Approximately 90 days after that as the 3rd CD matures buy a 12 month CD
  5. Approximately 12 months after the first purchase roll over the 4th CD into 1 year CD.

Now you have 4 CD later, with one maturing every quarter. When starting it doesn't matter if there is a interest rate difference between two CDs, the goal is to stagger the terms.

You could do the same with longer length CDs.

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  • Thanks @mhoran_psprep, but my question really is, why not just keep reinvesting the 3 month CD as it matures? If the interest rate is higher in 3 months, then I want to have enough cash to take advantage. In other words, why tie up my money for a longer period at a low interest rate if I don't have to? – 286642 Jul 28 '20 at 19:07

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