Does a CD Ladder Make Sense When Rates Are Likely to Fall?

There are two big benefits to opening a CD instead of sticking to a regular savings account. First, CD rates tend to be higher than savings account rates because you’re making a commitment to keep your money in the bank.

Also, CD rates are guaranteed for the duration of the term you sign up for. If you open a 12-month CD with a 5.00% APY, you’re guaranteed that much interest over that year. On the other hand, your savings account could be paying 4.30% now, but that could change to 3.90% in a few months’ time.

But there’s a downside to opening a CD, and it’s being forced to keep your money in the bank for its duration or otherwise risk a penalty for removing your money early. The extent of that penalty will depend on your bank. But as an example, one big bank charges a penalty of three months of interest for an early withdrawal of a 12-month CD term or shorter.

That’s why laddering your CDs is such a great strategy. With a CD ladder, instead of putting a lump sum of money into a single CD, you split your money up and open multiple CDs with varying maturity dates. The idea is to make sure that a portion of your money is freeing up every few months, thereby making it less likely that you’ll get stuck with an early withdrawal penalty.

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You may be wondering if building a CD ladder makes sense at a time when interest rates are likely to fall. But the answer is, absolutely. In fact, a CD ladder could be especially beneficial right about now.

Why a CD ladder works today

The reason today’s CD rates are so strong is that the Fed spent much of 2022 and 2023 raising interest rates to slow inflation. To be clear, the Fed only sets the federal funds rate, which is what banks charge one another for overnight borrowing. But when that benchmark interest rate rises, CD rates (and rates for other consumer products, including loans) tend to follow suit.

But because inflation has cooled considerably, the Fed is expected to start cutting interest rates this year. And once that happens, CD rates could follow in the same direction.

It’s for this reason that you may want to open your next CD now, while rates are still strong. And you should also consider a CD ladder to not only reduce your chances of an early withdrawal penalty, but to lock in a great rate on a longer-term CD while you can.

Say, for example, the bank you’re exploring has a 4.25% APY on a 6-month CD, a 5.00% APY on a 12-month CD, a 4.45% APY on an 18-month CD, and a 4.00% APY on a 24-month CD. If you’re positive your emergency fund is all set and you can afford to part with a sum of money — say, $10,000 — for up to the next two years, then you can split that sum into four and open a series of $2,500 CDs maturing in six months, 12 months, 18 months, and 24 months, respectively.

This strategy works because a portion of your money is freeing up every six months. But also, you’re locking in a higher interest rate on a couple of longer-term CDs while rates are still up overall.

To put it another way, while you might snag a 5.00% APY on a 12-month CD today, in a year from now, the best you may be able to get for that term is 2.50% or 3.00% — we really don’t know. So by locking in that 24-month CD, you’re still guaranteeing yourself a pretty good rate without committing all of your money long term.

A strategy that works well no matter what CD rates look like

While laddering CDs makes sense right now, it’s a good strategy in pretty much any interest rate environment. So if you have a sum of money you’re looking to open a CD with, don’t just put it all into a single CD and call it a day. Spread that money out so you’ll have access to it at regular intervals and avoid the cost and stress of an early CD withdrawal penalty.

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