There’s really no way around it; the best interest rates at any given time tend to come with the longest-term CDs. Five-year CDs generally pay more than two-years, two-years generally pay more than one-years, and so on.
Does that mean that earnings-minded customers should load their savings entirely into the single highest-yield, longest-term CD available? Not necessarily. The result might be great if you make the CD purchase at a time when interest rates are peaking, but it’s more likely that rates will fluctuate – possibly rising – as you wait for that single CD to mature.
Many customers have found a way to hedge against fluctuating CD rates in hopes of getting the best overall return, long-term. It’s called CD laddering. Basically, it involves staggering CD purchases over time, so that eventually a portion of the total deposit is always close to maturity, and all of it is earning a long-term rate.
Sound complicated? It’s really not. Let’s break it down into simple steps to show how a basic ladder might work for you.
1. Decide on a total amount to deposit in your CD ladder. Ally sets no minimum deposit for CD purchases, so any amount can work. For this explanation, we’ll go with $5,000 because it’s a nice, round number, and we like easy math.
2. Decide on a time frame for the top rung of your ladder – the rung farthest out of reach. Ask yourself: What’s the maximum length of time that I’m willing to lose access to any portion of my money? We’ll go with five years. That means the longest-term CD – and eventually all CDs – in this ladder will be five-year CDs.
3. Put one-fifth of your total deposit – or $1,000 – into a five-year CD to start earning those long-term rates. For now, consider shorter-term CDs for the rest of your total deposit. You could opt to buy several CDs of different terms – a four-year, a three-year, a two-year and a one-year.
4. Each year, as one of your shorter-term CDs matures, move that fifth of your total deposit into a new five-year CD, placing it at the top of your ladder. At the same time, you’ll be watching previous five-year CDs move a year closer to maturity, or down one rung.
5. Five years after you start, your first five-year CD will reach maturity. At that point, you can cash it in, or let it ride. As long as you keep the ladder intact, all of your CD savings will be earning a long-term rate. But you’ll never be more than a year away from being able to access one-fifth of it, should you want to withdraw.
But don’t feel tied to this example. Maybe you think it’s wiser to stick to CD terms of two years or less during times when interest rates nationwide are relatively low – as they have been for a while now. If so, you might want to build your ladder with Ally’s Raise Your Rate CDs and stagger them six months apart instead of a full year. We’re partial to the way this product lets existing customers take advantage of new rates, when rates rise. Or maybe you want to throw a no-penalty CD into the mix, reserving complete freedom to withdraw at any time after seven days post-account opening without losing a penny to penalties.
Investigating the different combination’s and options for your CD ladder is a great way to gain confidence in your ultimate choice. To help you with your research, here are a few articles and resources we like:
Creating a CD Ladder for Your Emergency Fund
How (and Why) to Create a CD Ladder
A CD Ladder Calculator
Know of other resources, have a question, or want to share an idea of your own? Let us know, using the comment feature below. In the meantime, happy laddering!