As interest rates in the broader market rise, banks are starting to offer decent rates on their Certificate of Deposit Accounts (CDs). If you’re a saver who wants to earn more than your checking account offers, consider investing in a CD ladder.
A CD ladder won’t make you rich, but it’s a useful tool for mid-term savings goal and investment withdrawals. This guide explains how to create a CD ladder that fits your goals.
Certificate Of Deposit Basics
A Certificate of Deposit (CD) entitles the account owner to a set interest rate for a given period of time. As the account owner, you must keep your money in the account for the set time, or you’ll face an early withdrawal penalty.
Withdrawal penalties typically range from 1 month of interest to 12 months of interest. While it’s wise to hold your CDs to maturity, you won’t be devastated if you have to withdraw early in the event of an emergency or opportunity.
CDs are FDIC insured, so you can’t lose your principal balance (unless you withdraw right away). Since these products bear no market risk, you can’t expect huge interest rates on the products. In fact, in recent years, CD interest rates haven’t matched inflation.
As a result, you shouldn’t think of CDs as wealth building vehicles. Instead, they offer some protection from inflation while protecting your principal.
What Is A CD Ladder?
A CD ladder isn’t some complicated financial product. It’s just a fancy way of saying that you should divide your savings into CDs with different maturities. For example, a person with $10,000 to invest might invest $2,000 in five different CDs ranging in maturity from one through five years.
As CDs come to maturity, that investor can choose whether to reinvest the money or to spend it according to their goals. Below, we outline how to create a CD ladder for cash flow and a CD ladder for mid term savings goals.
A CD ladder offers benefits that a long term CD does not. First, a CD Ladder offers more liquidity than a long term CD. In a CD ladder, a CD comes to maturity every year, so you can access your money without paying withdrawal penalties.