How to safely grow your money with a CD ladder

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Hanna Horvath, CFP®

Hanna Horvath, CFP®

Managing Editor & Certified Financial Planner™

Hanna Horvath, CFP®, is a certified financial planner and former managing editor at Policygenius. Her work has also been featured in NBC News, Business Insider, Inc. Magazine, CNBC, Best Company, and HerMoney.

Published May 14, 2019 | 3 min read

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If you have a big money goal you’re saving up for, or just want to safely grow your nest egg, your best bet may be a be a certificate of deposit, or CD.

“It’s the safest option if you don’t know which way interest rates are going,” said Dennis Nolte, certified financial planner and vice president of Seacoast Investment Services.

But putting your money in a CD can mean not being able to touch money for an extended period of time. If you’re looking for a secure way to grow your money without losing access to all of it, a CD ladder may be for you.

What is a CD ladder?

CDs are bank accounts with fixed interest rates much higher than regular savings accounts. CDs have maturity dates, typically between 1 and 10 years. Once they mature, you get your money back, with interest. Longer-term CDs earn more interest, but you can’t withdraw the money beforehand without facing steep fines.

This is where a CD ladder comes in. It’s a strategy where you divide up your money and put it into multiple CDs with different maturity dates. Instead of putting all your money into one CD and continuously renewing it, a CD ladder can get you high returns without losing access to all your money.

“The basic concept is you invest a portion of your assets, particularly what you need in the short-run, in a series of CDs of varying maturities, or steps. You might have 5 to 10 steps on the ladder,” said Leon LaBrecque, certified financial planner and chief growth officer at Sequoia Financial Group. “As a CD matures, you replace it with a CD on the tail end of the maturity ladder.”

You can ladder your CDs for as short or long as you want. For example, if you have $10,000 to invest, you could divide it up into four CDs, $2,500 each, with varying rungs of six months, one year, 18 months and two years. Every six months, you get a payout and have the option to reinvest money back into a CD.

LaBrecque said CD laddering appeals to people who want to grow their money but avoid the risks of the stock market and other investments. They’re especially appealing today because interest rates have increased.

Per Federal Deposit Insurance Corp. data, the average national annual percentage yield on traditional savings accounts is 0.10%. Many CDs have APYs over 2% — a big difference in return. The likelihood of the Fed hiking rates this year is low, meaning now may be the best time to lock in rates.

What are the benefits of CD ladders?

They’re very safe. As long as your deposits are within FDIC limits(the amount of money that’s protected if the bank fails), there is virtually no risk of losing what you put into a CD, said LaBrecque.

It’s more accessible. When putting your money in one CD, you lock your money in at a fixed rate, and are stuck with that rate if interest rates increase down the road. With CD laddering, you’ll stagger the deposits to get the highest possible return if rates go up.

Other options

Another way to grow your money? A high-interest savings account. It’s a bank account available typically through an online bank that pays a higher interest rate on deposits than a traditional savings account.

High-interest savings accounts tend to have interest rates lower than CDs, but have much more liquidity. You aren’t blocked from accessing your money or forced to pay a withdrawal fee.

Keep in mind that interest rates on high-yield savings accounts fluctuate with the market. So if rates go up, you’ll start making more money. But if rates go down, your interest earnings go down. You can compare savings and money market account offers online with Policygenius’ partner Even Financial.

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Image: Max Ostrozhinskiy