Why the CD laddering strategy makes sense in 2024
Saving money is always important, but 2024 is an especially good time to be a saver. With high interest rates still available, you have multiple options to consider when choosing how to earn the most interest.
One popular option is to use certificates of deposit (CDs). When you open a CD, you're agreeing to keep your money in the bank for a certain period in exchange for a favorable interest rate. CDs come in a variety of terms, generally ranging from one month to 10 years. It's important to choose the CD term that is best for you, as there can be penalties for taking money out of a CD early. If you aren't sure whether you want to go with a short- or long-term CD there is a popular strategy that does both – the CD ladder. 2024 could be an especially good time to consider a CD ladder, as you can lock in the current high interest rates while not locking all of your money away for too long.
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Why the CD laddering strategy makes sense in 2024
CD laddering works like this: you open multiple CDs with different terms and split your money between them. For instance, let's say you have $10,000 you want to put into CDs. Your CD ladder could look like this:
When the 1-year CD term is over, you have an option – if you need the money in it for some reason, you can move it to your checking or savings account. If not, you reinvest all of it – including your interest – in a new 4-year CD, adding another "rung" to the ladder.
While CD laddering can be a worthwhile strategy anytime, here's why it especially makes sense right now:
Rates are high, but could come down
Rates for savings products like CDs are high right now. This is largely because the Federal Reserve has repeatedly raised the federal funds rate to fight inflation. While the Fed does not set CD rates, banks tend to have their rates track alongside the federal funds rate. While inflation was slightly up in December, it is still way down from its peak in June 2022. For this reason, the Fed has intimated that cuts to the federal funds rate could be coming in 2024. If this happens, CD rates could decrease as well.
When you open a CD, you are locking in your rate. So, even if rates go down during the term of the CD, you'll still earn interest at whatever the rate was when you opened the account. For this reason, it makes sense to open CDs, especially longer-term CDs, right now.
"Maybe you do want to lock in that 3-4% 5-year CD because you think rates are going to drop in the future," says Hanna Horvath, a certified financial planner.
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Liquidity is still important
If you have $20,000 you are positive you won't need for four to five years, you could put it all into a long-term CD and wait for the interest to start accruing. It's important to remember, though, that you cannot access your funds in the CD until the term is up. If you do need to take money out early, there are penalties.
"CD early penalty withdrawal fees can be quite high, and they kind of negate any gains you might make," says Horvath.
A CD ladder is a good way to get the best of both options. You have some money available to you each year if you need it, either for a big purchase or simply because you need more cash in your budget. You are also able to earn the big compounding gains that come with a long-term CD, though.
One important note – don't put all of your money into CDs, even if laddered. You need some money available for everyday spending, and you should have an emergency fund that is readily available at any time. This money can be stored in a high-yield savings account, where rates are also high right now – but rates for these accounts are variable, meaning you'll earn less interest when banks start to lower rates.
How to use the CD laddering strategy
Building your CD ladder is easy. First, find a bank you trust offering high yields. The highest yields will often be found at online banks. Traditional financial institutions have a lot of overhead for their brick-and-mortar locations; online-only banks don't have those costs and can often then offer higher rates to customers.
Once you've found the bank you want to use, you'll proceed to open as many CD accounts as you want in your ladder and deposit however much you want in each one. When the CD with the shortest term matures, take the money (again, including any interest earned) from that CD and reinvest it in a long-term option.
The bottom line
A CD ladder is a good way to get the best of both worlds when it comes to CDs – you get the flexibility of a short-term CD with the compounding interest of a long-term option. In theory, you can continue this strategy for as long as you want with 2024 being a great time to start.
