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If you're looking for a flexible way to save, but still want to take advantage of high interest rates, building a CD ladder could help. Although interest rates on CD accounts have been softening, many accounts still offer rates around 4%.
With a CD ladder, you can lock in these higher interest rates while they last and still access your cash at regular intervals.
Here's a breakdown of how they work and how much you can earn with this savings approach.
What is a CD ladder?
With a CD, you agree to keep your money in an account for a certain period in exchange for a guaranteed interest rate. Terms range from three months to five years or more.
The longer the term, the higher the rate. But you may not want to lock your money up for years. One way to stay flexible is with a CD ladder.
A CD ladder is a savings strategy where you spread your cash between several CD accounts with staggered maturity dates. This lets you take advantage of higher rates on longer-term CDs, while keeping a portion of your funds accessible at short-term intervals.
CD ladders offer a flexible way to save your cash, as you'll be able to access your money at regular intervals. Plus, opening a CD ladder eases the pressure of guessing whether CD rates will rise or fall.
You can easily compare the best CD rates using the Bankrate tool below:
Building a CD ladder
To build a CD ladder, spread your cash among CDs of varying maturities — say, one, two, three, four and five years. Some of your savings will earn higher rates than long-term CDs offer.
When your first CD matures, you can cash out or reinvest the cash in a new 5-year CD to continue building your ladder. Then, when subsequent CDs mature, you'll continue to reinvest those funds into new CDs to maintain the ladder. Plus, if rates continue to rise, you'll be able to reinvest the money at a higher yield.
You'll earn more if you ladder using CDs at more than one institution, but you'll have to weigh the extra time you'll spend setting up multiple accounts.
Here's an example of how a CD ladder would work. Typically, a CD ladder splits your cash into five "rungs," meaning you'll open five CDs, one year to five years.
Let's say you have $20,000 to invest. One way you could spread your cash is by splitting it equally.
- $4,000 in a one-year CD
- $4,000 in a two-year CD
- $4,000 in a three-year CD
- $4,000 in a four-year CD
- $4,000 in a five-year CD
When each CD matures, you'll invest your cash, plus any earned interest, into another 5-year CD. This leaves you with five 5-year CDs, one maturing each year.
Advantages of a CD ladder
- Consistent cash flow: Since each CD matures at a regular interval, you have consistent access to your cash.
- Interest rates: As each CD matures, you have an opportunity to reinvest your cash and take advantage of any rise in interest rates.
- Flexibility: You can save in CDs at different financial institutions, letting you score the best interest rates available. Plus, you can choose whether to reinvest your cash once your CDs mature.
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Disadvantages of a CD ladder
- Active management: Since you'll be opening multiple CDs, potentially at different banks or credit unions, it'll take some work to manage your accounts. If you forget to move funds from one CD to another once it matures, the CD could roll over into the same term that just ended.
- Inflation: Although rates are high, they are still outpaced by inflation. You could earn more from more aggressive investments, like stocks or bonds.
Are CD ladders a smart approach among rising inflation?
CD ladders can make sense when interest rates remain elevated but the path forward is uncertain. The Federal Reserve recently left its benchmark interest rate unchanged, maintaining the federal funds target range at 3.50% to 3.75%. While policymakers held rates steady, they also signaled that persistent inflation could keep borrowing costs higher for longer.
That uncertainty is one reason CD ladders can be appealing. Many of today's best CDs continue to offer APYs around 4%, allowing savers to lock in competitive returns while still gaining regular access to a portion of their money as each CD matures.
As each rung of your ladder comes due, you can decide whether to reinvest at current rates or use the cash elsewhere. That flexibility can help you adapt if interest rates move higher or begin to decline, making a CD ladder a practical option for savers who want predictable returns without locking up all of their money for years.
Bottom line on CD ladders
While a CD ladder strategy works for some people, it won't work for every saver. It all comes down to how you feel most comfortable saving, and how readily you need to access your account deposits.
Factors to consider:
- You can't change or remove rungs once you put your money down. If something happens where you need your money before the CD term is up, you may have to pay penalties for cashing out early. If you need even more flexibility and access than a CD ladder can provide, a high-yield or money market account might be more your speed.
- CDs are typically FDIC insured, meaning your cash will be covered up to $250,000 at any given bank. And since you lock in your interest rates, a change in the economy or outlook from the Fed won't affect your future savings.
A CD ladder is just one way to grow your savings. If you're deciding between CDs, money market accounts, high-yield savings accounts or other investments, a financial advisor can help you create a personalized plan based on your goals and timeline.
Use the Bankrate tool below to connect with a financial professional and get started today:
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