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Understanding and Optimizing Your CD Ladder Strategy

If you have a CD ladder, you may need to adjust your strategy when interest rates are high or leveling off. Whether you should make a change depends on your goals and when you want access to the money in your certificates of deposit.

How a CD Ladder Works

A CD ladder consists of at least three “rungs” of CDs with staggered maturity dates. This means that instead of having all your money tied up in a single CD, you can have portions of it available at intervals you choose. For example, if you have $5,000 to invest, you could divide it among five CDs with maturities a year apart.

Example of a Five-Year CD Ladder

• 1-year CD: 5.3% $1,000
• 2-year CD: 4.85% $1,000
• 3-year CD: 4.4% $1,000
• 4-year CD: 4.2% $1,000
• 5-year CD: 4.1% $1,000

Alternatively, you could opt for short-term CDs, such as three, six, nine, and twelve months. This flexibility allows you to access your funds more frequently.

How to Adjust Your CD Ladder When Rates Are High

If you have CDs in a ladder you established a few years ago, it might be wise to consider withdrawing even if you will incur a penalty. Just two years ago, interest rates were much lower than now. If you bought CDs then, paying a penalty (or forfeiting some interest) could allow you to lock in a higher rate now—though whether that’s wise depends on the penalty fee and how much you could potentially gain by withdrawing your money.

Steps to Take When Rates Are High

• Revisit your rates: Check every rate for CDs you currently hold. If you have rates that are not competitive, decide whether it’s worth it to pay any penalty fees or forfeit interest to lock in a higher rate now.
• Consider your goals: Keep your goals and timelines in mind when you choose maturities. For example, if you are saving for a cruise in January 2025, you might want to put your money in a nine- or twelve-month CD that matures shortly before payments are due.
• Diversify your CD terms: Consider putting half of your money into a ladder of short-term maturities and half into longer-term maturities.
• Consider other saving options: Decide whether a CD ladder is still the best strategy for you.

Alternatives to CD Ladders

While CDs have the advantage of guaranteeing a rate and typically being federally insured, they also have some drawbacks, including limited liquidity and potentially lower earnings compared to stocks or bonds. Here are some alternatives:

High-Yield Savings Accounts

High-yield savings accounts, typically offered by online banks, give you more access to your money than CDs do and offer rates close to or as good as CDs. However, their rates are not guaranteed and can fluctuate based on market factors.

Money Market Accounts

Money market accounts function like a hybrid checking and savings account, providing higher interest rates than traditional savings accounts. However, they may limit the number of transactions you can make and may offer the highest rates only if you maintain a high minimum balance.

Bonds

Bonds represent money that investors lend, usually to a government entity or corporation, for a certain period. Treasury bonds are backed by the federal government, municipal bonds involve lending money to cities, counties, and states, and corporate bonds may offer higher interest rates but come with higher risk.

Dividend-Paying Stocks

Dividends are company profits paid to shareholders, typically on a schedule. They do not come with guaranteed returns; however, they may offer higher returns than CD ladders.

The Bottom Line

A changing interest rate environment might be a reason to give an existing CD ladder a second look. You may want to lock in high rates now on certain CDs or consider distributing your cash with possible future lower rates in mind. It’s never a bad idea to take an overall look at the way you are managing your money and credit.

For any mortgage-related needs, feel free to call O1ne Mortgage at 213-732-3074. Our team is here to help you make the best financial decisions.

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