Many banks are offering some of their best rates in years on certificates of deposit (CDs). Since rates may drop later this year, now could be a smart time to open a CD so you can lock in the current rates.
If you’re worried about not being able to access your money, CD laddering is a great solution. Instead of opening just one CD and putting all your savings there, you open multiple CDs of different lengths. Here’s how much you could make this way if you have $5,000 saved.
Here’s how much you can make with $5,000 in a CD ladder
The amount you earn from a CD depends on the amount you deposit, the annual percentage yield (APY), and the length of the CD. For this example, we’ll assume that you divide $5,000 equally into five CDs ranging from three months to two years.
The table below shows how much each $1,000 CD would earn in interest at its maturity date. The rates used were the best CD rates I found at the time of writing.
| Term | APY | Earnings |
|---|---|---|
| 3 months | 5.26% | $13.16 |
| 6 months | 5.23% | $26.16 |
| 1 year | 5.13% | $51.27 |
| 18 months | 4.75% | $71.24 |
| 2 years | 4.55% | $91.00 |
Data source: Author’s calculations.
In two years, your CD ladder earns a total of $252.83 in interest. That’s a return of 5.06% on your $5,000.
CD ladders like this work well, because they get you the benefits of CDs while minimizing the drawbacks. You get a fixed interest rate on all your CDs, so you’re protected if rates drop. Since you have CDs of different terms, you’ll also have a portion of your savings available every few months. You won’t need to wait years for money to free up, like you would if you put all your money in a 2-year CD.
How to build your own CD ladder
Ready to start a CD ladder? It doesn’t take long. Start by figuring out how much you’ll deposit in total and how you’ll divide that up between different CDs.
Pro tip: Even though CD ladders are more flexible than a single CD, it’s still not a good idea to put all your savings in them. Your emergency fund, for example, needs to be easily accessible at any time. High-yield savings accounts are a better choice for that.
Next, start shopping around for CDs. Keep in mind that you don’t need to open all of them with the same bank. In fact, it may be better that you don’t. It’s rare that one bank has the highest CD rates across the board. By opening CDs with different banks, you can maximize your earnings.
The main factor to look for in a CD is the APY, since that determines how much interest your savings will earn. Make sure the bank you choose also has FDIC insurance that protects your money in the event of a bank failure (or NCUA insurance if it’s a credit union).
Finally, see if there’s a minimum deposit requirement. If so, make sure it works for the amount you plan to deposit. Don’t worry if you’re not depositing much money — there are plenty of CDs with $0 minimums.
Once you’ve found your CDs, you can open each one and deposit your money. After that, just wait for your CDs to mature, and you can collect your earnings.
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