Thinking of Buying a CD? You Should Buy 5 Instead

There’s been a lot of buzz about certificates of deposit lately because their yields are the highest they’ve been in almost two decades.

If you’re tempted by the chance to buy a safe investment paying great rates, you may be looking into what CDs you can buy right now. It can be difficult to choose, though. Should you buy a one-year CD paying about 5%, or lock in a 4% rate for a longer time with a five-year CD?

The good news is that you don’t have to choose. In fact, buying several different CDs is a smart investing strategy.

Here’s why buying multiple CDs makes good sense

Let’s assume you have $2,500 to invest. There are lots of CDs out there with different interest rates and term lengths. You could put your $2,500 into a long-term CD, which would guarantee you get today’s competitive rates for years. Or you could buy a short-term CD so you have access to your money sooner. There’s a tradeoff to be made with either of these approaches, though.

But if you buy five CDs instead of investing in just one, you can build something called a CD ladder. Here’s how a CD ladder would work:

• Put $500 into a one-year CD
• Put $500 into a two-year CD
• Put $500 into a three-year CD
• Put $500 into a four-year CD
• Put $500 into a five-year CD

If you do this, some of your CDs will mature every year, so you’ll have regular access to a portion of your funds. You’ll never have to wait more than a year to be able to take some money out. You’ll also get the benefit of locking in today’s rate for a long time. And, as a bonus, you’ll get to benefit from the higher yields short-term CDs are currently offering while also protecting yourself from rate cuts over the long term.

If this timeline is too long for you, you could take an alternative approach and invest:

• $500 in a 3-month CD
• $500 in a six-month CD
• $500 in a 10-month CD
• $500 in a 12-month CD
• $500 in an 18-month CD

You’d be able to access some of your money every few months, and you’d still earn a great rate on your investment for a whole 18 months.

And with any CD laddering method, you can reinvest the money when each of your CDs mature so you’ll have a steady supply of income coming in from CDs on a set schedule.

Why is it a great time to invest in a CD ladder?

CD laddering is almost always a good strategy because you lock in your rates for the long term while still being able to access your money on a pretty regular basis. But it’s an especially great option right now. That’s because short-term CDs are currently paying higher yields than longer-term CDs.

This is not common. There’s usually a “term premium,” which means you’re paid more for agreeing to lock up your money for a longer period. However, because most experts widely expect interest rates to fall soon, banks don’t want to make long-term promises now. As a result, they’re offering better yields on shorter CD terms.

This means when you build your ladder, you won’t be accepting lower rates on some of the “rungs” just to keep your money accessible. Instead you’ll actually get the highest rates on your most accessible CD investments and lock in rates on long-term CDs that are still very competitive by historical standards.

So if you were thinking of buying one CD, consider splitting up your money and buying five instead. Many CDs have no minimum investment requirement these days, so you can try this technique even without a ton of money.

Check out The Ascent’s guide to the best CD rates to find options with different terms offering the best rates.

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