I Only Have $1,000. Is a CD Ladder Still Worth It?

It's important to have money in a savings account for emergencies at all times. In fact, your emergency fund should ideally contain enough cash to cover a minimum of three full months of essential living expenses. But if you have money at your disposal beyond that, then it could be a good idea to open a certificate of deposit (CD) -- especially now.

The Federal Reserve raised interest rates numerous times during 2022 and 2023 in an effort to slow the pace of inflation. That drove borrowing costs up across the board, but it's also led to higher CD rates. So now's a good time to open a CD -- before the Fed starts to cut rates and CDs start to pay less.

Now, you'll often hear that laddering your CDs is a smart move. With a CD ladder, you split your available funds into portions and open a series of CDs with different maturity dates. This way, you have some money freeing up at different times during the year, as opposed to having all of your money tied up for the same duration.

But what if you only have $1,000 to put into a CD? Is a ladder still worth it? Here's why it could be.

It's all about minimizing risk

With a CD, you get the benefit of a guaranteed interest rate on your money during its term. The interest rate on your savings account, by contrast, could fall with market conditions.

Granted, it could also rise. But at this point, the general consensus is that savings and CD rates are only going to start to fall from where they are today, not go up. So the benefit of a CD is that if you open one at, say, 5%, you're guaranteed 5% on your money until your CD matures. If you put money into a savings account that's paying 5% right now, in four months, you might only get 4%. And in six months, your APY may be down to 3.5%.

On the other hand, with a CD, you're required to commit to keeping your money in the bank for its duration. And taking an early withdrawal could result in costly penalties. There's no "official" penalty for early withdrawals that banks have to universally conform to. Rather, each bank can make its own rules.

When you open a CD, your bank will have to inform you of the potential penalties as part of its disclosure process. But as an example, the penalty for taking an early withdrawal from a Capital One CD with a term of 12 months or less is three months of interest. That's a penalty you'd probably rather avoid.

And that's why laddering CDs makes sense -- even when you're only putting a relatively small sum in the bank. You never know when an expense might arise that your emergency fund can't handle, so having some cash free up sooner rather than later could be helpful.

In fact, let's say you have $1,000 to work with right now, so instead of opening a single 12-month CD, you open four different $250 CDs with maturities of three months, six months, nine months, and 12 months. You might lose your job in a few weeks and deplete your emergency fund. If you're on the cusp of starting a new job but just need a small amount of cash to tide yourself over until your next paycheck, having your first $250 free up after three months could be your ticket to avoiding a penalty.

It's good to give yourself options

Basically, what a CD ladder gives you is flexibility and protection against penalties (to some degree, at least). So it's worth taking a laddered approach -- even if the sum you're putting into the bank isn't so substantial.