Want Flexibility While Building Wealth? Use a CD Ladder

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KEY POINTS

  • You might earn a lot more interest in a CD than in a regular savings account.
  • The danger of CDs is having to lock your money away for a preset period of time.
  • CD laddering allows you to benefit from CDs while accessing your money at different intervals.


It's a smart tactic to employ.

There was a point not so long ago when putting money into CDs largely didn't pay off. The reason? CD rates were downright awful. And given the restrictions involved, such as not being able to touch your money without risking a penalty, it made more sense to keep extra cash in a regular savings account.

But these days, CDs are paying more generously. So are savings accounts, for that matter. And if you put money into a CD, you might walk away with a really nice interest rate with very little risk.

After all, as long as your CD deposit doesn't exceed $250,000 at an FDIC-insured bank, you're guaranteed to walk away with at least $250,000 once your CD comes due. If you invest your money in a brokerage account, there's a chance you could lose some of it if market conditions aren't good, or if the specific assets you choose happen to decline in value.

But the one drawback of putting money into a CD is tying it up for a preset period of time. One strategy, however, makes this less of a problem.

Get regular access to your cash

Dumping all of your spare cash into a single CD isn't really the best idea. What happens if you invest $20,000 in a one-year CD but have a need for money six months down the line? If you cash out your CD before it comes due, you'll be hit with a penalty that will generally amount to a few months' worth of interest (each bank ultimately assesses its own penalty, but generally, that's what you'll be looking at).

That's why a better approach to saving in CDs is to build yourself a CD ladder. With a CD ladder, you spread your money across different CDs with different maturity dates. That way, some of your cash gets freed up at different times.

So, let's say you have $20,000 to put into a CD. Rather than open one CD, what you'd do is take $5,000 and open a one-year CD. You might then open another one-year CD with $5,000 three months later, and another three months after that. So all told, what you're doing is making sure you have access to a chunk of your money once a quarter.

Of course, this is just one example. You could decide to space out your CDs so they're maturing every six months instead of every three months. The point, however, is not to put all of your cash into a single CD with a single maturity date.

Give yourself that flexibility

These days, putting money into CDs is a pretty good bet. But the last thing you need is the stress of feeling like you can't access your money when you need it.

Laddering your CDs can eliminate that worry and help ensure that you have freed-up cash at your disposal every few months. And that could help you feel far more comfortable with the idea of tying money up in a CD.

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Rates as of Feb 28, 2024 Ratings Methodology
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APY: up to 4.60%

APY: 4.35%

Min. to earn APY: $0

Min. to earn APY: $1

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