While it may seem complex at first, a CD ladder is a straightforward way to get the best possible interest rate, while still maintaining regular, penalty-free access to some of your savings. Here’s how it works, for you.
Video Transcript:
When it comes to long-term savings, small advantages make a big difference. And that can come down to getting the best interest rate on your money. One way to do that is with something called a CD ladder. And here's how it works.
Certificates of Deposit, or CDs, are a great way to save. They come with FDIC protection, and can offer better rates than savings or money market accounts. One reason that CDs can deliver higher interest rates is that they require that you keep your money deposited for a fixed amount of time. Those higher rates are based on how long you deposit your money. For instance, a CD with a term of five years can come with an annual interest rate that's as much as four times as high as the rate on a CD with a term of just three months. But even if you’re saving for the long term, you would probably still like some flexibility. That's where a CD Ladder comes in.
In a CD Ladder, you deposit your money in a series of CDs, with terms ranging from three months to six months to nine months to one year, and so on - all the way up to five years. Each rung of the ladder is a CD of a different duration. As each CD comes to maturity, you can take the money—and the interest—and deposit it in a five-year CD at the top rung. Three months later, when the next CD matures, you take the money and interest from that rung, and put it in a five-year CD, and climb the ladder. And three months later, you do the same thing with a nine-month CD rung, and so on. That way, you have penalty-free access to some of your savings every three months. And over time, all of the money in the ladder will move to the higher interest rates offered by a longer-term CD.
With higher rates and steady access to your savings, that’s how a CD ladder works, for you.