Author | Aram Anthony
With forecasts of a possible impending recession, continued inflation (or not) and other concerns driving the economic discussion, people are increasingly concerned about tying their money up in long-term commitments. This is especially true about Certificates of Deposit (CDs). But a growing number of savers have discovered a strategy known as CD laddering that enables them to enjoy a number of benefits, from taking advantage of the current high interest rates to a steady stream of income.
Building a CD ladder is easy. You simply take the total amount you would normally put in one CD and break it out across several CDs of varying commitment lengths and with different maturity dates.
The benefits of CD laddering
Interest rates on even short-term CDs are surprisingly strong right now — rates in the 4% to 4.75% range are not uncommon for six- and nine-month CDs, with 12-month CDs offering even higher rates — so people are seeing them as a viable investment option that allows them to earn a good rate of return without a long-term commitment.
In addition, by staggering both the term length and the maturity date, money becomes available throughout the year rather than all at once. When a CD does mature, you have the option of taking the cash for other uses or reinvesting it into a new CD.
Looking ahead: how long will CD rates remain at their current high levels?
CD rates respond to, or reflect, the Fed’s rate hikes and cuts. When the Fed takes a pause on hiking rates, some forecasters predict that CD rates will then soften.
That said, there are strong indications that the Federal Open Market Committee will raise its rate one or two more times this year. This provides savers with a strong incentive to invest in short-term CDs now to take advantage of their high rates, while preserving some up money so they can be prepared for any Fed rate hikes later in the year.
Is a CD ladder right for you?
A lot of those who have adopted the CD ladder strategy are looking to earn a high yield for their money while maintaining a level of liquidity that can help them meet approaching life events, such as an impending retirement or a child’s graduation.
Another reason people are choosing to build CD ladders is best expressed by Chikako Tyler, chief financial officer at California Bank and Trust, who said, “Astute investors who watch forward interest rates will likely want to take advantage of locking in higher-yielding, safe investments while they can.”
She does add a caveat worth keeping in mind: “It’s always important to remember that no one can predict interest rates, so it is essential to diversify.”
Consider before committing
Investing in a CD means that you are willing to tie your money up for the length of the term, be it three, six, or nine months or longer. Be aware that if you take a withdrawal before your CD matures, you will pay a penalty fee.
If you need greater flexibility than what traditional CDs offer, no-penalty CDs are available. They generally don’t pay as high a rate as standard CDs, but the best ones are competitive with them and worth considering.