Mo Money's Building Wealth Blog

Online banks are paying some pretty good interest rates on savings accounts these days, but if you want to be certain to lock in these rates for a set period you might want to consider Certificates of Deposit (aka CDs).

Currently shorter term CDs are paying over 5%.  While they seem to be an attractive option for parking some of your savings you might have some trepidation, as I do, about not being able to access your money, without penalty, for the duration of the CD.  There’s an option though that might help you feel better about doing just that, and it’s called CD Laddering.

CD Laddering is a strategy where you purchase a series of CDs at staggered maturity rates so that you have regular access to some of your funds.  Let me use a simple example of wanting to invest $12K in CDs.  Instead of putting it in a single one year $12K CD you might consider doing the following:

• Put $3K in a 3 month CD
• Put $3K in a 6 month CD
• Put $3K in a 9 month CD
• Put $3K in a 12 month CD

In this way you have access to $3K every 3 months.  When the CD comes due you can either use any of the cash as needed or simply roll it over to a 1-year CD, so the cycle can continue.

I like to take things a step further though and take $1K of that matured CD and roll it into a 1-year CD.  Then, I do the same for the next two successive months.  I repeat this when the 6-, 9-, and 12-month CDs come due.  So, after a year I have a CD coming due every single month in the event that I might need that money.  Having a CD coming due every month just makes me feel more comfortable.

You can do CD laddering with any amount and any staggered duration that works for your own situation.  In fact, if you feel that interest rates have peaked you can even choose CDs that mature multiple years out.  The choice is yours and the flexibility is there.

Another tip is that you don’t need to travel to banks anymore to purchase CDs.  You can do so online directly from a bank or more simply and with more options at the online brokerages like Schwab, Fidelity, and Vanguard.  Doing it through the brokerages makes it super convenient as they offer access to CDs with competitive rates from FDIC insured banks all over the country and will email you when they are about to come due.

What are you waiting for.  Start saving more and climb the CD ladder today!