Is one large CD better than multiple of small ones?

Question

I'll have $500 a month to save towards the down payment of a house. is it better to keep the $500 a month in a 3%APY savings account and then put it into a two year CD or should i have small CD's that i keep reinvesting over a short term? WaMu's current online 8 month and 12 month rate are 4.25% APY. why would one be better than the other?

Answer 1

If you already have a large amount of money, a single large CD is better.  But as you are putting away $500 a month, why put it into a account paying 3% or less while building up a large amount.

The best way would be to put the $500 in saving for one month and on the second month take first month $500 and second month $500 ($1000) and buy a CD at best rate, regardless of period.  After about 6 months, you may have a CD mature, when this happens, add that months $500 or $1000 to amount from CD and buy another.  Same thing if you have more then one CD mature at same time.

Keep doing this till it starts getting close to time you will need money and then start buying for shorter periods, so that they will all mature at same time as you need money.

Answer 2

It is just easier to account for. If you are under the FDIC limits then 1 large cd is no problem.

Answer 3

No, I would ladder them with different maturities.

Answer 4

Normally, you should just go for the best interest rate.  Many banks offer higher rates for larger amounts, so one large CD is best.   The rate you are looking at is higher than other CDs.  So go for the longer term to lock it in.    

The only time there is an advantage to several small CDs is when you anticipate needing the money before a longer term CD would mature.   But some banks will allow partial withdrawals from a CD.  If yours does, then there would be no reason for multiple CDs.

Answer 5

When there is substantial money involved it is better not to have it in one CD. If you need the money before maturity than you will have to cash it in and pay the penalty. If you have a few smaller CDs you can just cash out what you need.

Usually it is good to ladder CDs. But in your case you will probably need all the money at the same time. So pick a time, say two years. Buy a 2yr CD now, in six months buy an 18 month CD in a year buy a 1 year CD etc so they all mature at the same time. Then put the money in a money market fund until you need it.