Locking into a long-term certificate of deposit can pose some unforeseen problems. For instance, there is a chance the interest rates may increase during your CD term, which means you can’t take advantage of that opportunity because you are locked into the lower rate. Or an emergency may arise that requires a large sum of cash, and you can’t withdraw from the CD without incurring a penalty. These situations are where a CD laddering strategy may come in handy. CD laddering is a way for investors to get higher rates with CDs but keep accessibility to funds by setting up multiple CDs at staggered intervals. As each CD finishes at a set term, you can maintain a steady stream of cash while still earning higher rates than a regular savings account.
CD laddering provides several benefits:
- Accessibility: Should you ever need it, your cash is available to you at frequent intervals.
- Match to goals: You can time the maturities of the CDs to match purchases like buying a car or tuition expenses.
- Better interest rates: You’ll get the benefit of high rates associated with longer-term CDs but with minimized risk.
- Flexibility: You’re not trapped if rates go up or down. You can adjust your investment to each “rung” based on the current interest rate.
Here’s one way you can set up a laddered strategy. Let’s say you have $20,000 you can put into a CD. Instead of putting all of it into one high-yield four-year CD, you put $5,000 into four different CDs with different term lengths; a four-year, a three-year, a two-year and a one-year. After the first one-year term CD expires, you can have the choice of either using the cash or re-investing into a new four-year term CD. You do this so that you have a CD term-end every year, and eventually, all will be at a high-yield four-year term.
This strategy requires diligent record-keeping and reminders. You will want to set a reminder a couple of days before the CD is due, so you can decide whether to take the money out or put it into another CD.
Whatever strategy you select should be in line with your goals and current situation. If you think there’s a higher likelihood you’ll need cash; you may want to break out the terms into shorter periods (three, six, nine, twelve months). If needing cash will not be a concern, but don’t want to miss out on raised rates, then stick to more of an annual term period.
If you want to know if a certificate of deposit is the right savings solution for you, give the experts at NASB a call at 800-677-6272. Look for more excerpts from our eBook, Everything You Need to Know About Certificates of Deposit in upcoming blogs.