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Building a CD Ladder

March 22, 2023

Have no fear of falling off this (certificate of deposit) ladder

In this higher interest rate environment, a strategy to efficiently use certificates of deposit (CDs) called laddering could help you lock in rates while keeping money more accessible. Best of all, CDs are easy to set up and follow online.

CDs are deposit accounts that sacrifice liquidity for higher annual percentage yields (APYs) than traditional savings accounts. Unlike other deposit accounts or many investments, CDs guarantee a specific yield, so you won’t need to worry about future interest rate fluctuation. In a higher interest rate environment (like now) where traditional investments may be riskier in the short-term, CD laddering can provide the best of both worlds.

CDs are set up so that interest rates are guaranteed until they mature — just keep in mind that you can receive a penalty for withdrawing early. So, if you put in $1,000 to a 12-month CD earning 4% interest, that account will earn $40 in interest and contain $1,040 when it matures.

Laddering divides your deposits into several smaller CDs, so you can access your funds more frequently, allowing for more liquidity if cash is needed.

By laddering, you stagger the maturity dates of multiple CDs, ensuring consistent returns on a quicker timeline. Consider this example: by putting your money in five CDs of different lengths instead of one 5-year CD, you could then withdraw some of your funds multiple times over the course of five years. That can be achieved without penalty instead of waiting the full five years to withdraw your entire deposit.

Depending on your situation, you may want to consider a “mini” CD ladder to allow for flexibility for possible withdrawals. With a “mini” ladder, interest would mature on a faster schedule. Consider this example with a $10,000 budget, where you build a “mini” ladder by opening a new $2,500 CD every three months:

CD Interest

Instead of only having access to your funds without penalty once per year, you’d be able to withdraw $2,500 (plus interest) every three months. Plus, if you don’t need to use those funds at maturity, you can reopen each CD as a 1-year CD to maintain the ladder.

CDs are a safe, conservative way to store money while taking advantage of higher interest rates in this environment, at the expense of immediate access.

CD ladders offer more flexibility than a single CD, giving you guaranteed cash — at the cost of potentially higher returns. Either option can provide you with peace of mind.

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