The best CDs are currently yielding at generous rates between 5% and 5.50%. With rates that high, you’re basically getting free money with little or no risk, plus a chance to freeze an APY before banks start reducing rates. You have a number of banks and credit unions to choose from, but, with CD rates likely going to change later this year, what’s the best strategy for investing in them? If you have a fair amount of spare change to invest, the answer is clear — a CD ladder.
Why CD ladders are the best strategy for today’s market
CD laddering is a strategy where you open numerous CDs with different maturity dates. Think of the “ladder” as extending forward in time, and the CDs as your rungs. You can have a 1-month rung, a 3-month rung, a 6-month rung, a 1-year rung, and onward for as long as you can afford.
Why would you stagger CDs like this? Well, one reason is that it ensures that you have cash available periodically. Most CDs have early withdrawal penalties, anywhere from a few months to a year or more of interest. So, instead of making a large deposit into one or two CD accounts, you can give yourself some flexibility by splitting your money among multiple CDs of different term lengths.
Combining short-term and long-term CDs in this way also helps you take full advantage of today’s best rates. Short-term CDs, which have higher APYs right now, let you earn more interest, while long-term CDs help you freeze those rates for longer periods.
This is important in today’s market because, by the looks of it, CD rates may not stay elevated for long. Everything hinges on the Federal Reserve’s monetary policy, which has hitherto been aggressively in favor of hiking its federal funds rate to extinguish inflation. The federal funds rate sets the pace for CD rates, so when one goes up (or down), the other isn’t far behind. The central bank hasn’t touched the federal funds rate since July 2023, but, if the economy continues improving, we should see rate cuts sometime this year.
Locking money into long-term CDs, then, is a great strategy for prolonging high CD rates. If you play your cards right, your CDs could be earning several times above the very best rates for several years to come. Likewise, short-term CDs can help you earn more interest now, but then give you the option to reinvest that money in other securities when they mature.
How to build a CD ladder for today’s market
To build an effective CD ladder for 2024, ask yourself the following questions:
- How much can I invest in CDs? You’ll split your deposit into smaller chunks, but it’s important to decide how much you’re willing to lock away in a CD of any term length. Keep in mind that CDs with high yields often have minimum deposits, like $1,000. This could limit how many CDs you can afford to purchase.
- What maturity dates do I want? You have options. I’ve seen CDs that mature in seven days and others that mature in 20 years. Most bank CDs, however, will have terms between six months and five years.
- What’s my backup plan if I need cash fast? Always have a plan B. While CDs can give you some flexibility, you might still need cash before they mature. Combine your CDs with a high-yield savings account, money market account, or no-penalty CD for more liquidity.
All in all, CDs are a great investment for 2024 both for their high APYs and guaranteed rates of return. Investing in one CD is fine, but if you have the cash and time horizon, definitely consider laddering them — you can extend the best rates on long-term CDs, while also capturing the very best APYs on the market.
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