% Of Liquid $ To Short Term CD Specials When Rates Are Rising?

Jacques321 | Jan 6, 2022 | 32 posts since 2018

What are your thoughts on parsing out liquid (savings) account balances into shorter term CD specials in this (prospective) rising interest rate environment?

Langley’s new 1.25% / 14 month / no upper limit CD has me thinking about what percentage of my liquid accounts I want to commit to what I suspect will be a growing list of short term CD specials. If you guess interest rates are on their way up, which I do, you may agree that it won’t take long for high yield savings account rates to catch up to, and eventually surpass, these early CD special rates. For example, I think it’s entirely plausible for high yield savings accounts to surpass 1.25% in 3-6 months.

Ken’s early withdrawal calculator has been a helpful tool, and understand it’s impossible to predict the future, but curious what other thoughts you may have.

Thank you in advance.

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Answers

NYCDoug | Jan 6, 2022 | 334 posts since 2011

As a starting point, maybe keep two years living expenses liquid, and divide the remainder into fifths, to be deployed over the next 14 months (through Langley's maturity), laddered opportunistically every quarter or so, knowing you'll have Langley's matured balance (or equivalent) to play with early next year.

And, if nothing compelling comes along each quarter, budget appropriately with regard to your living expenses. But also set some targets, and make allowances for that elusive, coveted 5-year CD @ 3%, in which you might want to go two- or three-fifths in.

It's a hard question to answer generically, without a full financial picture . . . key variables being your annual spend (including taxes) vs. dividends/cap gains/interest etc. (including possible Social Security / Pensions / Annuities) that may or may not be able to sustain your lifestyle on their own. And which affect the amount you realistically have to park for a while in CDs . . .

But in this current environment the use of laddering is surely part of an ideal financial plan. The question for you is at what breakpoints you feel comfortable -- more an intuitive call than pure science, given that the future is patently unpredictable.

So, again, I'd start by coming up with investment window time frames (every quarter? every two months?) and amounts (such as fifths) of that portion of your liquid assets you could temporarily (and feasibly) part with at any given time. And see where your gut response takes you. (Oh, that's too much! Or: Oh, that's too little!).

The bigger unknown is the terms of these compelling short-term promotional rate CDs. Six months? Two years?
But at least having an initial basic plan to work from, and freely improvise on, will help jump start your unique divinatory prowess. Just don't sell the farm, nor bet the farm :-)

Hope that helps!

NYCDoug | Jan 6, 2022 | 334 posts since 2011

A twist on the foregoing might be the following: Instead of dividing up your CD-investable assets into equal sums, budget to invest increasingly more cash in increasingly higher-rate CDs.

So, for example, instead of dividing $100k into four equal parcels of $25k each, you might go for
$10k
$20k
$30k
$40k

At what terms (APY and duration) are still a matter of divination, but the profit motive should be clear: allocate more money for higher-rate CDs. So you might forecast some sample rates, and budget accordingly:
$10k @ 1.5%
$20k @ 2.0%
$30k @ 2.5%
$40k @ 3.0%

Of course it's still a matter of conjecture (gambling) to bet on rising rates -- how fast, how much -- but this at least provides another conceptual framework to consider. With more sophistication, but also more risk, in that you won't know if your delayed gratification -- saving that $40k for the big kahuna -- has paid off . . . until it's too late!

Jacques321 | Jan 6, 2022 | 32 posts since 2018

Thank you, NYCDoug, for your thoughtful response to my overly broad question. I’m a fan of laddering but paused my 5 year (quarterly) ladder after my 1st quarter 2021 CD (a 5 year, 1.45% APY CD from Barksdale FCU), based on a feeling that the low interest rate light was at the end of the tunnel. I still had a savings account paying 1.25% (Zynlo promotion) and rates appeared to have bottomed out. Ultimately the rate difference (even with a (low) 6 month early withdrawal penalty on the CD) was just too tight to keep going. I hope to fill in the blanks in my 5 year ladder with shorter term CDs when rates improve.

I’m still enjoying a 1% return on TMobile’s checking account. As we’ve discussed on the thread for Langley’s 14 month CD, I’m also interested in that CD but intend to keep the relative size of the CD fairly low based on a feeling that rates are on their way up. I suspect they’ll be led by promotions (like Langley’s) where banks try to lock in larger sums early at lower rates, followed by rates on liquid accounts meeting and eventually surpassing these early specials.

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