If you’re looking for a reliable, low-risk way to earn on your savings, a certificate of deposit (CD) ladder offers both long-term interest rates with steady returns. As the Federal Reserve continues to raise interest rates, cash accounts like these become even more attractive as they see record-high returns. Still, it’s important to keep in mind that a CD ladder is not an alternative to an investing strategy because inflation often outpaces even the highest of yields.
What is a CD ladder?
A CD ladder is a savings strategy in which you open multiple CDs at different intervals. CD ladders have the benefits of higher interest rates that come with long-term CDs while also having access to cash. Each CD, which are the “steps” that are integral to a CD ladder, is a fixed deposit that earns interest over a specific period.
What makes CDs different from high-yield savings accounts is that the deposit can’t be withdrawn or adjusted during the term or you could face fees and loss of interest. While there are some CDs that don’t carry early withdrawal fees, they tend to have much lower interest rates.
Bump-up CDs are a kind of CD that allows you to adjust the CD’s interest rate once during the period the deposit is maturing. “The [way these work] is that you put the money in and it might be paying 3% or 4%, but if the interest rates jumped to 5% or 6% during your term, you can contact the bank and increase your interest rate in the middle of the term,” says Brent Weiss, a certified financial planner and founding member of Facet.
How CD ladders work
CD ladders work by giving investors staggered returns as the CDs expire one by one. This way, investors can get the benefits of CDs while still getting regular cash yields.
What makes CD ladders effective is that savers have the benefit of longer-term interest rates that are locked in for a set period of time, as well as cash returns since the different CDs are expiring in succession. You could build one CD ladder for a set expense you know you’ll have in the future, such as a car payment or tuition bill, and cash out when the big day arrives. Or, you could also reinvest the money when each CD matures into a new certificate at the best CD rates available at the time, creating an ongoing ladder.
It is important to keep in mind that while CD ladders are a great way to take advantage of high-interest rates, they’re not considered a long-term investment strategy. For goals like retirement savings, a Roth IRA or a 401(k) that invests in equities in the stock market are the best choices. “A major point I want to reiterate is that a CD ladder shouldn’t be an alternative to a longer-term investment or wealth-building strategy,” Weiss explains.
How to build a CD ladder to get staggered returns
The key to building a successful CD ladder is staggering your investments in CDs so that they mature in succession, but not at the same time. For example, if you have $2,500 to invest, you could invest in five CDs that range from one-year to five-year CDs. When one CD matures, you can cash it out and reinvest the money in a new CD that matures however many years away you want to continue the ladder.
If you are new to investing in CDs, shopping around different financial institutions for the best interest rates is a great way to make the most of your CD ladder. Weiss explains that he usually advises his clients to have relationships with at least two different banks so that if one bank has issues they still have an institution available to draw cash from.
The takeaway
CD ladders can be a great strategy for those in retirement or anyone looking to see steady returns in a low-risk, safe savings method. “I always tell my clients, don't just chase the rates, follow your plan and define what you're trying to achieve when putting money either in a high-yield savings account or buying CDs,” Weiss explains. “Make sure that your plan fits what you're trying to achieve in your financial situation.”
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To earn the max on your deposit, check our ranking of the best CD rates.
Our ranking of the best jumbo CD rates can help you maximize your earnings on big deposits.
Short-term deposit investors can find a great rate on our list of the best 3-month CDs.
The best 1-year CD rates ranking can help you earn a tidy return on a 12-month deposit.
Choose one of the best high-yield savings accounts to boost your APY.
EDITORIAL DISCLOSURE: The advice, opinions, or rankings contained in this article are solely those of the Fortune Recommends™ editorial team. This content has not been reviewed or endorsed by any of our affiliate partners or other third parties.
A CD ladder is a savings strategy that allows you to take advantage of CDs' higher interest rates with more liquidity. Your CD ladder can have as many "rungs" (aka different CD accounts) as makes sense for you. A CD ladder is a flexible option whether you're saving for a short- or long-term goal.
A CD ladder can help you build a predictable investment return. It also provides the potential to earn better returns than you would with a single CD and the ability to access a portion of your savings each time a CD matures.
A CD ladder is a savings strategy where you spread a lump sum of money across multiple CDs (certificates of deposit) with different maturity dates. The goal of CD laddering is to lock in high APYs (Annual Percentage Yields) across multiple CDs, instead of lumping all of your funds into one CD.
With a savings account, the money is easily accessible in case of a financial emergency or a change in spending priorities. With CDs, you typically can't withdraw the money whenever you want—at least not without paying a penalty.
For example, in a CD ladder with 6, 12, 18, and 24 month CDs, you would reinvest in a 2 year CD every 6 months as your next CD matures. This means that, over time, your portfolio has the yield of a 2 year CD but without having to lock up all of your investment funds for the entire two years.
Inflation can hurt returns: You'll need to be careful when investing in CDs during changes in interest rates or you could effectively lose money. For example, if inflation rises above the interest rate on your CD during the term, you will make less on interest than inflation.
CD laddering is the single best way to take advantage of today's high CD rates. Short-term CDs let you capture the best APYs, while long-term CDs can lock those rates in for several years.
Losing money in a CD is highly unlikely. However, it's not impossible. If you're thinking about opening one, read the fine print about early withdrawal penalties, and be sure to compare more flexible options that don't have a maturity date. And even if you decide to open a CD, don't set it and forget it.
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.
Multiple CDs can help you capitalize on interest rate changes if you believe CD rates will change over time. You might put some cash into a higher-rate 6-month CD and the remainder into a 24-month bump-up CD that allows you to take advantage of CD rate increases over time.
CD laddering is a strategy that involves investing in multiple CDs with different maturity dates. It's a simple but effective way to take advantage of an interest rate environment that's always changing, no one wants to guess wrong on their deposit rates.
Multiple CDs can help you capitalize on interest rate changes if you believe CD rates will change over time. You might put some cash into a higher-rate 6-month CD and the remainder into a 24-month bump-up CD that allows you to take advantage of CD rate increases over time.
A five-year CD is a low-risk investment with predictable returns and a significantly higher yield than traditional savings. When interest rates are high, a five-year CD allows you to lock in an attractive rate for a relatively long time.
During the Great Recession and its aftermath, the stock market went through turbulent shifts, resulting in great losses for some stockholders. CDs are one option that can help protect your investment from times of turmoil by providing a stable income.
Introduction: My name is Dean Jakubowski Ret, I am a enthusiastic, friendly, homely, handsome, zealous, brainy, elegant person who loves writing and wants to share my knowledge and understanding with you.
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