Investing in Certificates of Deposits (CDs) is a great way for investors to minimize their risks and keep a portion of their investment strategy safe from changes in the stock market. If you are interested in an investment that can earn you more than a checking account, consider building a solid CD ladder.
What is a CD?
A CD is a federally insured savings account that provides a fixed interest rate. Translation: You’ll know exactly what to expect when it matures.
Real-world example: A deposit of $1,000 into a 2-year CD at 2.25% annual percentage yield (APY) would result in a $1,046.03 payout that includes principal and dividends at the time of the CDs maturity*.
CDs come with a variety of maturity dates. Most mature between six months and five years.
What is a CD ladder?
A CD ladder is NOT some complicated financial product that is hard to understand. It’s just a way to divide your savings equally and invest in accounts that have different maturity dates.
Using a CD ladder can help you stay a step ahead of the changes in rates and keeps your ability to invest when the rates increase. When you ladder CDs, you can obtain new CDs and take advantage of higher interest rates while still having access to your money.
For example, you could invest $5,000 dollars into 5 different CDs with varying maturity dates, generally one every year. As the CDs mature, you can decide to reinvest or spend according to your goals.
A CD ladder is generally better than just one long-term CD because you will have regular access to your money and avoid paying withdrawal fees to access your money on demand.
CD ladders are protected from interest rate risk. If all your savings are tied up in one CD, you likely won’t be able to take advantage of rising interest rates. By diversifying CDs, you protect yourself from lower interest rates while still being able to reinvest at a higher rate when the CDs mature.
The first step in building a CD ladder is to determine the number of years that you’d like to invest, and that will be the length of the ladder.
Let’s say you plan to purchase a home in five years and have $10,000 saved:
Your CD ladder could look something like this:
- $6,000 in a five-year CD
- $1,000 in a four-year CD
- $1,000 in a three-year CD
- $1,000 in a two-year CD
- $1,000 in a one-year CD
Every year you would reinvest your savings and the mature CD into a new CD that matches the year you plan to buy your home. That means the $1,000 from the first year CD would reinvest in a four-year CD.
If you did this every year, the investments would all mature at the same time. You would have a sizable chunk of cash to put toward your new home.
Why CDs are the right move
Stocks and real estate don’t make good short-term investments. CDs are excellent because they are a known form of equity and are guaranteed to not lose money. Stocks often earn more money long-term, but the gains are never guaranteed. You could lose money in any given year. Real estate is also great long-term, but the equity that you gain isn’t accessible at any given time. CDs are the right move in the short term for guaranteed returns.
Where to find the best rates
When you begin your CD ladder, make sure that you are getting the best rates. Vantage West has very competitive rates that align with the best in the market. We’d love to help you begin your CD laddering journey!
*Fees may reduce earnings.