Certificates of deposit (CDs), at first glance, are one of the least interesting financial products on the market. They’re stable and offer guaranteed returns. But because of that, there’s also a limit to how much they will pay out, so you may be prone to overlooking them.
Still, if you know how to leverage these products, you can maximize your earnings and somewhat avoid the issue of kissing a large chunk of cash goodbye for years at a time. The key is using a CD ladder.
Here’s what it is, how it works, and how much you could earn by investing in based on today’s rates.
How a CD ladder works
A CD ladder requires you to take out multiple CDs at the same time, each with different maturation dates. So, for example, you could take out a 3-month, 6-month, and 1-year CD. That way, you’d have access to some of the funds relatively quickly, while the rest could still be earning the high rates we’re seeing right now. And you’d minimize the risk of paying penalties for taking funds out early, which can happen if you open a single CD and need to access your cash before the term is up.
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If desired, you could keep the ladder going by opening more CDs as they mature.
How much you could earn with a $5,000 CD ladder
Let’s say you opt for the following CDs:
| Term | APY | Initial Deposit |
|---|---|---|
| 6 months | 4.95% | $2,000 |
| 1 year | 5.05% | $2,000 |
| 3 years | 4.00% | $1,000 |
Data source: Author’s calculations
By the end of the 3-year CD term, you’d have earned $270.50 in total interest. That’s equivalent to getting a 5.41% APY — and if you open them all at the same time, you’d be locking in those earnings. So even if rates drop later on, you’d be covered for the length of your CD terms. And you could take your cash and reinvest it into more CDs when each term is up, building on those earnings even more.
For example, adding another $2,000 6-month CD with a lower 4.8% APY would bring the total to $318.50 —Â and it wouldn’t extend your deadline. So you’d have up to five opportunities to check in and verify that you can afford to lock that amount away for a given period of time over the three-year period.
And the same principle applies to 1-year CDs, which you could also reinvest. Although it’s impossible to predict exactly how rates will change over the next three years, continuing to earn interest on your original deposit is always a good thing.
CD rates are high right now, so locking those in can set you up for much higher returns than you might find with other products, like savings accounts. And if you do it right, you can give yourself the opportunity to further maximize those earnings. It just takes a bit of strategic thinking and a healthy dose of patience.
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