What’s a CD Ladder?

Last week, The Juice reported that vinyl record sales surpassed compact disc (CD) sales for the first time since 1987. This got us thinking about another type of CD… 

The unsexy but pretty powerful certificate of deposit. 

We’re seeing negative headline after negative headline about all kinds of interest rates. On mortgages. On credit cards. And, maybe most annoying of all, on savings accounts at the nation’s biggest brick-and-mortar banks.

It’s awful that the government hasn’t nudged banks – or made a law! – to make them increase the interest they pay on deposit accounts as the Fed continues to hike rates and they go up everywhere else. 

So you have to search (you can do it online) and maybe move your money to ensure you get the best rates. Once you find a suitable bank, consider the following savings strategy. 

CD Ladder

To create a CD ladder, you spread equal amounts of money across multiple certificates of deposit with different maturity dates. With interest rates on CDs at some banks approaching or even surpassing 5%, this option can make sense.

Let’s say you have $10,000 you want to park somewhere. 

In this example, we’ll use Capital One’s latest CD rates, which, among big banks, are some of the best. They even compete with online banks. 

Here’s how you can group your money:

• Put $2,500 in a six-month CD with a 3.3% interest rate 
• Put $2,500 in a nine-month CD with a 3.3% interest rate
• Put $2,500 in a 12-year CD with a 4.15% interest rate
• Put $2,500 in an 18-month CD with a 4.25% interest rate

The six-month CD will have earned roughly $40.92 in interest at maturity, leaving you with $2,540.92. You can take that money – penalty-free – and run. Or you can roll it over into a new CD. 

As your CDs mature, you keep doing this. 

The beauty of this approach is not only that it tends to generate more income than a standard savings account, but that you don’t tie up all your money for a long time. Every few months, you can take out some cash if you need or want it. 

Of course, generally, the longer the term you agree to, the higher the interest rate the bank will pay you. 

The Bottom Line: Amid this soaring inflation, to get anything close to a competitive rate at the nation’s biggest brick-and-mortar banks, you have to meet account and maybe even relationship minimums.  

But other options exist – at large, reputable banks – where you can realize meaningful income and put together a short- or long-term strategy to maximize your savings.

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