Certificate of Deposit (CD) ladders can be a good option for people who have a lump sum of money to invest and who want to earn a higher interest rate than they would on a savings account. They can also be a good option for people who want to have access to some of their money on a regular basis.
CD laddering is a savings strategy that involves investing in multiple CDs with different maturity dates. This way, you have CDs maturing regularly, giving you access to your money while also earning higher interest rates.
How to Ladder CDs
To ladder CDs is to open multiple certificates of deposit (CDs) with different maturity dates. This strategy allows you to take advantage of higher interest rates that come with longer-term CDs while also having access to cash.
CD Ladder Example
Let's say you have $10,000 to invest. You could divide this money into four CDs, each with a different maturity date:
- 1-year CD: $2,500
- 2-year CD: $2,500
- 3-year CD: $2,500
- 4-year CD: $2,500
Once the 1-year CD matures, you will have the option to withdraw the money or reinvest it in a new 1-year CD. If you choose to reinvest, you'll be able to lock in a new interest rate for another year. This process will continue as each of the CDs matures, this way you'll always have some of your money invested in CDs with higher interest rates.
Laddering CDs can be a good savings strategy for people who have a lump sum of money to invest and who want to earn a higher interest rate than they would on a savings account. It's important to weigh the benefits and drawbacks of laddering CDs before deciding if it's right for you; and of course, choose the best CD rates for maximum interest.
Benefits of Laddering CDs
Earn higher interest rates. Longer-term CDs typically offer higher interest rates than shorter-term CDs. By laddering CDs, you can take advantage of these higher interest rates while still having access to some of your money on a regular basis.
Reduce risk. Laddering CDs can help to reduce your risk of being locked into a low interest rate. If interest rates rise, you can reinvest the proceeds from your maturing CDs into new CDs with higher interest rates.
Have access to cash. By laddering CDs with different maturity dates, you'll always have some of your money available to withdraw if needed, creating a steady stream of income that you can use to pay expenses or save for retirement.
Drawbacks of laddering CDs
Less liquidity. CDs are less liquid than savings accounts, meaning that you can't withdraw your money without penalty before the CD matures. If you need to withdraw money from a CD early, you may have to pay an early withdrawal penalty.
Requires more planning. Laddering CDs requires more planning than simply opening a high-yield savings account. You need to decide how much money you want to invest in CDs and how many CDs you want to open. You also need to decide what maturity dates you want for your CDs.
