What You Should Know about CD Ladders

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A Certificate of Deposit (CD) is a specialized savings account that earns interest on a lump sum for a set period of time. The lumped sum is locked into the account until that period ends and the account officially matures. At that point, you can access the higher balance and use it however you please. 

You don’t have to take out one CD at a time. You can take out multiple CDs. You can do this to create a savings strategy called a “CD Ladder.”

What Is a CD Ladder?

A CD Ladder is when you take out multiple CDs with different maturity dates and divide your lump sum amongst them. For instance, you could have a one-year CD, two-year CD, three-year CD, four-year CD and five-year CD. This will allow you to grow your funds with interest without committing to one long-term CD. 

Once you reach the shortest maturity date, you can access the account’s larger balance for personal use. Maybe you’d like to add the balance to an emergency fund, a college savings fund or a debt repayment plan. Or you could use the balance to add another rung to your CD ladder. 

Simply open up a new CD with a maturity date that’s staggered from your other accounts and put the balance inside of it. You’ll be re-investing your funds to gain more. As long as you don’t need your funds to be liquid, you can keep adding to your ladder every time a CD matures.

Don’t Rely on a CD for Emergencies

A CD will lock away your funds until the account matures. As an accountholder, you won’t be able to access those funds until you reach that maturity date. If you try to withdraw funds from the account early, you’ll have to pay an early withdrawal penalty. 

This is why CDs aren’t effective accounts for emergency funds. You will want your emergency fund to be liquid. When there’s an urgent expense, you’ll want to access your savings right away without having to jump through any hoops or pay any penalties. 

If you make the mistake of putting your emergency fund inside of a CD, you’ll either have to face the early withdrawal penalty or find an alternative method to cover an urgent expense. You could charge an urgent expense to your credit card and then pay down the card balance afterward. Or you could look into quick small personal loans available online. As long as you meet all of the qualifications for a small personal loan, you could fill out an application. You just might get approved for it.

In the case that you get approved for a small personal loan, you can use the borrowed funds to manage the urgent expense in a short amount of time. Then you can follow a loan repayment plan through a monthly billing cycle.

Know Your Maturity Dates

It’s very important that you remember the maturity dates of all of the CDs in your CD ladder. Why? Some banks will automatically renew a CD unless you intervene. Once a maturity date arrives, you’ll want to take action right away so that you have control over the balance sitting inside it.  

You Are Stuck with the Interest Rates

Interest rates will change over the years, but they will not impact the balance sitting in your CD. Your CD’s interest rate is locked in from the moment that you sign up for it — even if that CD is open for a 10-year term. So, if the interest rates are high that year, you can benefit from locking in a great rate and benefitting from its growth. If the interest rates are low, you might have to accept that smaller growth rate.

One of the advantages of a CD ladder is that you are locking yourself into different accounts, which could potentially mean different interest rates. You aren’t putting all of your eggs into one basket. 

So, are you interested in building a CD Ladder? This could be your next big investment!

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