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Should I ladder to beat low CD rates?

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Certificates of deposit (CDs) can be a great way to earn a higher interest rate on the money that you have deposited at a bank. However, opening a CD usually means committing to locking up your money at a bank for months or years without touching it to avoid an early withdrawal penalty.

Short-term CDs reduce your commitment, but also usually reduce the interest rate that you’ll earn. When interest rates are low, it can be tempting to open a higher-yielding long-term CD to try to beat the low rates offered by savings accounts and short-term CDs.

But building a CD ladder offers the best of both worlds, as it limits the restrictions placed on your savings and lets you get the high interest rates offered by long-term CDs, too.

What is CD laddering?

CD laddering means opening multiple CDs, each with a different maturity date. The idea is to set up the CDs so that one of them matures on a regular schedule, giving you the option of taking the cash or reinvesting in a new CD with a higher yield if rates have moved higher.

For example, you could build a CD ladder with four CDs and construct it so that one matures every three months. “With this type of CD ladder, one comes due every three months so you always have access to some of your cash,” says Eric Nisall, an accountant and founder of AccountLancer.

Typically, if you make an early withdrawal from a CD before it matures, you have to pay a penalty. With a CD ladder, like the above example, you can make a “withdrawal every few months and not have to deal with paying the early withdrawal penalty,” Nisall says. This gives you some flexibility while letting you capture the higher interest rates offered by CDs.

To construct this type of CD ladder, you would open the following CDs, each with equal dollar amounts:

  • 3-month CD
  • 6-month CD
  • 9-month CD
  • 12-month CD

One of the CDs will mature every three months during the 12-month period. When the CD matures, you have two options:

  • You can withdraw your funds
  • If you want to keep the CD ladder going, you should renew the CD as a 12-month CD

After one year, you’ll have four 12-month CDs, with one maturing every three months.

You can construct CD ladders in all sorts of ways. You could build a ladder with 12 CDs, one maturing each month, or five CDs, one maturing each year. It depends on how much flexibility you need when it comes to accessing your cash and how much flexibility you’re willing to sacrifice for interest rates.

Should you start a CD ladder in a low-rate environment?

Building a CD ladder is much less convenient than using a savings account. On top of the reduced access to your cash, you have to go through the effort of opening and keeping track of the accounts.

This begs the question of whether building a CD ladder is worth the effort in a low interest rate environment. But even in a low-rate environment, CD ladders can be worth the effort depending on your goals.

“Laddering is an all-weather strategy designed to diversify your cash investments among a range of maturity dates and provide a more predictable flow of interest income,” says Greg McBride, Bankrate’s chief financial analyst. “The benefits may be less apparent in a prolonged low rate environment, but it is still an effective way to meet both of those objectives.”

Rates aren’t everything

CD laddering may help you earn slightly higher interest rates on your emergency fund or other savings, but higher rates aren’t the only reason to consider a CD.

If you have some extra money set aside for a specific goal or event, like buying a car or going on vacation, it might be worth opening a CD to keep that money sequestered from your other savings and to reduce your temptation to spend it on something else.

If you’re the type of person who can feel like your money is burning a hole in your pocket, building a CD ladder with your savings might be worth the effort to avoid overspending, even if the interest rate benefits aren’t huge.

Compare CD rates

If you think a CD ladder might be the right choice for you, you should take some time to compare different CD providers. You want to find a bank that offers high rates without huge minimum balance requirements or fees. This will help you maximize your earnings and increase the benefit of your CD ladder.

Our guide to the best CD rates is a good place to start, but don’t forget to do research where you live. You may find a local bank or credit union that is offering a good deal.

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Written by
TJ Porter
Contributing writer
TJ Porter is a contributing writer for Bankrate. TJ writes about a range of subjects, from budgeting tips to bank account reviews.