If you’ve been hearing a lot about CD ladders lately, you’re not alone. This financial strategy has gained popularity recently, but you might be wondering why it’s a hot topic now and not so much in the past?
In this blog post, we’ll explore the reasons why a CD ladder may be a great option for you in today’s financial landscape.
We’ll also discuss why it may not have been as appealing over the past few years. So, let’s dive in and uncover why CD ladders are trending now.
First, what is a CD?
A Certificate of Deposit (CD) is a financial product offered by banks and credit unions. It is a type of time deposit where you agree to keep your money in the account for a fixed period, known as the term or maturity. In return for locking in your funds, the financial institution pays you interest on the CD.
CDs typically have higher interest rates compared to regular savings accounts because they require you to keep the money untouched for a specific duration. The length of the term can vary, ranging from a few months to several years, depending on the CD you choose.
One key feature of CDs is that they are considered low-risk investments. Since your funds are held in an FDIC-insured bank or a credit union, your money is protected up to a certain amount, even if the financial institution encounters financial difficulties.
During the term of the CD, you generally cannot withdraw the funds without incurring a penalty. However, once the CD reaches its maturity date, you have several options. You can choose to withdraw the money, including the interest earned, or you can reinvest the funds in another CD or other investment options.
*It’s important to note that while CDs offer security and stability, they may not provide high returns compared to other investment options such as stocks or mutual funds. As with any financial decision, it’s crucial to consider your financial goals, time horizon, and risk tolerance before investing in a CD.
So, why are CD ladders making waves these days?
Two main reasons:
- Rising Interest Rates: In the years following the 2008 financial crisis, interest rates remained low for an extended period of time. This made CD yields relatively unimpressive compared to other investment opportunities. Lately, rates have been on the upswing lately. This is great news for CD’s because higher rates mean increased earnings on your investment. With higher yields, CD ladders become more attractive as a low-risk strategy for growing your money.
- Economic Uncertainty: The financial world has its ups and downs, and periods of uncertainty can make investors nervous. During times like these, CD ladders shine as a safe haven. They provide stability and a reliable income stream, making them an appealing option for risk-averse individuals.
Who Can Benefit from a CD Ladder?
Let’s talk about who can get in on the CD ladder action. If you’re someone who wants to play it safe, prefers predictable income, and isn’t a fan of taking big risks, a CD ladder might be perfect for you. Check out these groups of people who can really benefit from it:
- Emergency Funders: If you’re building up an emergency fund, a CD ladder is like a supercharged savings account. You’ll earn more interest while still having easy access to your money.
- Retirees: Picture this—you’re enjoying your golden years and need a steady income. That’s where a CD ladder comes in handy. It keeps the cash flowing without putting your nest egg at risk.
- Short-Term Goal Chasers: Whether you’re saving up for a down payment on a house or funding a trip to Bali, a CD ladder can help you grow your money while keeping it safe.
How a CD Ladder Works
Now, let’s break down how a CD ladder actually works. It’s pretty straightforward:
- Set your money goals: Figure out what you want to achieve with your money. Do you want regular income or do you want to protect your cash? That’s step one.
- Spread out your investment: Take the money you want to invest and divide it equally across different CDs with different maturity dates.
- Choose CD terms: Pick CDs with different timeframes, like 3 months, 6 months, 1 year or 2 years, etc. This helps create that ladder effect we mentioned earlier.
- Get started: Buy your first CD with the shortest term and let it mature.
- Reinvest or withdraw: When your first CD matures, decide if you want to put the money into a new CD with the longest term or take the cash out altogether.
- Keep the cycle going: As each CD matures, repeat steps 4 and 5 until your ladder is complete.
Complementing Investing with a CD Ladder
A CD ladder can be an awesome part of your financial tool kit, but it’s not the only move you should make with your money. It’s actually way cooler when you use it alongside other investment strategies.
Want to learn how to invest? Learn more about the Money Confident Program, right here.