An unbeatable CD strategy for a rising rate environment – Low Calorie Diets Tips

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Here’s a strategy to consider if you’re worried about making the most of your savings.


Important points

  • CDs generally pay higher interest rates than savings accounts, but you’ll have to tie up your money for years to get the best rates.
  • On the other hand, a short-term CD gives you more financial flexibility, but typically pays less.
  • A CD ladder can give you the best of both worlds.

Certificate of Deposit accounts or CDs pay better interest rates than savings accounts, all other factors being equal, but there are some major downsides. In particular, CDs fixed deposits, which means you commit to keeping your money in the account for a certain amount of time in exchange for the higher return. And banks generally give higher APRs for long-term CDs than for shorter-term CDs.

However, there is a strategy known as a CD ladder that could help solve the problem, taking advantage of the high returns of long-term CDs, but with significantly greater financial flexibility.

What is a CD ladder?

If you’re unfamiliar with the concept of a CD ladder, the general idea is pretty simple. You divide your money into equal amounts and use them to buy CDs with different maturities.

For example, let’s say you have $10,000 set aside that you want to keep in cash, and you don’t expect to need the money for at least the next few years. You could split it into five equal $2,000 amounts, using one to open a one-year CD, one to open a two-year CD, and so on. Or, if you want instant access to some of your savings, you can buy 1-year to 4-year CDs and leave the other $2,000 in a high-yielding savings account that you can withdraw from at any time.

The idea is that some Your money makes the high APY banks willing to pay for long-term CDs, but you leave some of your money in shorter-term CDs, giving yourself more flexibility with the money than if you had invested the entire amount in. And if interest rates rise over the next year or so (as most pundits are predicting), you can benefit with a CD ladder, as I’ll explain in a moment.

How CD yields work

In general, the longer you are willing to leave your money in a CD account, the higher the rate of return, or APY, you can expect. For example, here are the current CD yields of selected maturities from a top online bank as of June 17, 2022:

CD duration

Current APY

1 year

1.60%

2 years

2.10%

3 years

2.30%

4 years

2.35%

5 years

2.75%

Savings account with high return

0.85%

Source: Marcus from Goldman Sachs.

Most of our other favorite CD institutions have similar revenue structures at this point. The main takeaway is that you’ll be paid significantly more for longer-term commitments. In this example, a five-year CD worth $10,000 would earn an additional $115 in interest in the first year compared to a one-year CD.

Why a CD ladder makes sense

There are some good reasons to use a CD ladder. Above all, a CD leader gives you some financial flexibility. It matures some of your money at short intervals, so you don’t have to tie up all of your money for long periods of time.

More importantly (in the current environment), a CD ladder can allow you to take advantage of rising interest rates over time. Consider the example where you split $10,000 across five CDs with maturities ranging from one to five years. When the one-year CD matures, you can take that money and reinvest it in a five-year CD, whatever the then-current yield. A year later, when the two-year CD is ripe, you can do the same. You ended up investing all your money in five-year CDs (at your bank’s highest interest rate). and A fifth of these will mature and may be available to you in any given year.

These savings accounts are FDIC insured and could earn you up to 12x your bank

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