Why You Should Build Out a CD Ladder For 2024

If you've been tuned in to the high rates on certificates of deposit (CD) this year, you're probably aware that the party is almost over. Word on the street is that the Federal Reserve could start cutting its federal fund rate next year, which would directly impact the APYs that banks offer on CDs and savings accounts. While many 12-month CD rates are still above 5%, there's no telling how long they'll stay that high.

For CD shoppers, that means now might be the best time to ladder high CD rates before monetary policy pushes them back down. Here's why.

CD ladders give you some flexibility with your savings

CD ladders combine short and long terms to help you access your savings at regular intervals. For example, if you had $25,000 in savings, you could divide your money between CDs of different maturities, such as $5,000 in a three-month CD, $5,000 in a six-month CD, $5,000 in a one-year CD, $5,000 in an 18-month CD, and $5,000 in a two-year CD. That way, you're never more than six months from accessing a portion of your savings.

Laddering CDs like this can solve one of the main problems with CDs: the early withdrawal penalties. Most CDs come with a penalty equal to a set period of interest for any withdrawals before maturity. For instance, an 18-month CD may charge you 180 days of interest if you liquidate your CD before the 18 months are over. Even worse, you'll pay that penalty regardless of if you earned 180 days of interest, which would be a loss of your principal if you didn't.

CD ladders could also solve the problem of partial withdrawals. If you're withdrawing before maturity, most CD providers require you to liquidate the entire balance -- even if you just want a small portion of your savings. Laddering CDs, however, would spread your money out and could help you leave some of your money invested. For instance, if you needed $5,000 to cover a surprise HVAC repair, you could liquidate one of your five $5,000 CDs, leaving $20,000 still invested in the others. You'd still pay a penalty, but it would be less expensive than liquidating a single CD worth $25,000.

Why you shouldn't wait to ladder your CDs

By and large, the main reason for laddering your CDs is to lock in today's high interest rates before they disappear.

Already, many short-term CD rates are starting to creep back. Banks and other financial institutions are speculating that the Fed is finished with its cycle of interest rate hikes, and it's adjusting CD rates accordingly. If inflation continues to cool, it's likely the Fed would start cutting the federal fund sometime in 2024, which would essentially spell the end of this era of high interest.

A CD ladder would lock you into today's high rates for a period that could extend five years. The idea is that you could be earning high interest at a time when the ongoing rate is several times lower. In essence, you'd get a guaranteed stream of income paying out at a higher-than-average rate.

All in all, if you've been contemplating building a CD ladder, now might be the time to take action. Rates aren't going to stay this high for much longer. Take a look at some of the top-paying CDs and start planning out your CD ladder before it's too late.