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What is a CD ladder? Advantages and examples of saving goals


Are you looking for a low-risk way to save money while earning a little interest? A CD ladder might be just what you need. In this post, we'll explain what a CD ladder is, how it works, and the advantages of using one for your savings goals.

What is a CD ladder?

A CD ladder is a savings strategy that involves dividing your money into several CDs (certificates of deposit) with different maturity dates. The CDs are arranged in a ladder, with each rung representing a different maturity date. For example, you might have CDs with 6-month, 12-month, and 18-month maturities. When the 6-month CD matures, you reinvest that money in a new 18-month CD, and so on.

How does a CD ladder work?

Let's say you have $10,000 to save. Instead of putting it all in a single CD, you divide it into four CDs of $2,500 each, with maturities of 6 months, 12 months, 18 months, and 24 months. When the 6-month CD matures, you reinvest that $2,500 in a new 24-month CD. When the 12-month CD matures, you reinvest that $2,500 in a new 24-month CD, and so on. This way, you always have some money maturing soon and some money earning a higher rate of interest for a longer period.

What are the advantages of a CD ladder?

There are several advantages to using a CD ladder for your savings goals:

  1. Low risk: CDs are FDIC-insured up to $250,000 per depositor, per insured bank. That means your money is safe even if the bank fails.

  2. Predictable returns: Unlike stocks or mutual funds, the interest rate on a CD is fixed for the term of the CD. You know exactly how much you'll earn, and there are no surprises.

  3. Flexibility: With a CD ladder, you have some money maturing soon and some money earning a higher rate of interest for a longer period. This gives you flexibility to adjust your savings strategy as needed.

  4. Higher yields: CDs typically offer higher interest rates than savings accounts or money market accounts. By using a CD ladder, you can take advantage of those higher rates while still having some liquidity.

Examples of saving goals with a CD ladder

Here are some examples of saving goals that might be well-suited to a CD ladder:

  1. Emergency fund: If you're building an emergency fund, a CD ladder can help you earn a little interest while still having access to your money when you need it.

  2. Down payment on a house: If you're saving for a down payment on a house, a CD ladder can help you earn some extra money while still keeping your savings safe.

  3. College savings: If you're saving for your child's college education, a CD ladder can help you earn some extra money without taking on too much risk.

  4. Retirement savings: If you're getting close to retirement and want to preserve your savings, a CD ladder can help you earn some extra income without exposing your money to market volatility.

In conclusion, a CD ladder can be a great way to save money while earning a little interest. By dividing your money into several CDs with different maturities, you can take advantage of higher interest rates while still having some liquidity. Plus, with FDIC insurance, you can be confident that your money is safe. Consider using a CD ladder for your next savings goal!

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