You're probably aware that a certificate of deposit, commonly called a CD, is a type of investment account. You might also be aware of the advantages and disadvantages of a CD. More specifically, you can get some really good interest rates for the money you put in a CD account if you're willing to keep it in a CD long enough. You've probably also thought that it's a shame you can't get those high rates of interest without sacrificing the ability to use your money whenever you want.
As it turns out, though, there is a way for you to take advantage of the high rates of interest long term CDs offer while still being able to access your money, or at least part of it. It's called a CD ladder strategy.
Here's the basics of a CD ladder strategy
What is a CD Ladder?
A CD ladder is an investment strategy to help you balance maximizing your earnings against keeping your money available when you need it. When you create a CD ladder, you split the money you were planning to use as your initial deposit in a CD among multiple CDs, each with different maturity dates.
An example of a CD ladder
For instance, let's say you've been saving for a while and have managed to save $100,000. You would love to grow that money, but the CD with the best interest rate has a five-year term. In other words, if you put your money in that CD, you won't get to touch it until five years have passed, at least not without paying an early withdrawal penalty that might wipe out any gains you got from the interest rate. That can be risky, especially if that money is part of your emergency fund.
However, if you were to use a CD laddering strategy, you would split that $100,000 into five $20,000 CDs, each one with a different term. For instance, your CD ladder might look like this:
- CD 1--one year term
- CD 2--two year term
- CD 3--three year term
- CD 4--four year term
- CD 5--five year term
All of these are like rungs on a ladder, and when the one-year CD matures, you purchase another five-year CD and create another rung on the ladder. All you need to do now is keep opening five-year CDs each time one matures.
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Why Should you Create a CD Ladder?
By this point, you can probably see the benefit of a CD ladder. At least part of your money will be able to take advantage of the high interest rate offered by multiple-year CDs, but every year you'll still be able to access $20,000 of your money, plus the money generated through interest, which will be significant. Eventually, all of your CDs will be five-year CDs and all of them will have a high rate of interest.
However, CD ladders have an additional benefit you may not have considered--peace of mind. . You'll be able to rest comfortably knowing that your money is earning a higher rate of interest.
Even better, you won't be bothered by changing interest rates. When interest rates rise, you will be able to purchase CD’s at the higher rates each year. If interest rates fall, the longer term CD’s you previously purchased were purchase at higher rates.
Is a CD ladder strategy suitable for short-term or long-term investments?
A CD ladder strategy is more suitable for short-term investments. It allows you to have access to your money at regular intervals while still benefiting from higher interest rates compared to traditional savings accounts. For long-term investments, other options like stocks or bonds may be more appropriate.
Can you use a CD Ladder to save for financial goals?
You absolutely can use a CD ladder to save for financial goals, but if you're trying to take advantage of the higher yields of long term CDs, your goals should be at least five years in the future. If you'd like to reach your financial goal sooner, you might want to use strategies that take advantage of shorter term CDs, like a CD bullet strategy.
Do I Need to Have the Same Amounts of Money in Every Certificate of Deposit in my CD Ladder?
Absolutely not. You can have different amounts of money in each CD. In fact, some CD ladder strategies suggest putting more money in the first CD of your CD ladder if you're worried about having access to your money. It's also worth pointing out that, since there may be a long time between opening CDs in your CD ladder, your financial situation may not be the same as when you started your CD ladder and you'll have to adjust the amount you put in your certificates of deposit accordingly.
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Set up a CD Ladder at First Alliance Credit Union
CD Laddering is a strategy used by investors that balances receiving higher interest rates with the convenience of being able to access your investment without penalties be assessed. Using a CD laddering strategy allows the investor to have a steady flow of cash that matures over different intervals of time. This lets you take advantage of the best CD rates
If you'd like to take advantage of a CD Ladder investing strategy, become a First Alliance Credit Union member today and talk with a member experience advisor about opening up a certificate of deposit. It's easy to do, and you can monitor your CDs by logging into our online banking platform or mobile app.