Use a CD Ladder, But Avoid Longer Terms

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NEW YORK (RateWatch) – It’s no secret that this a bad time to invest in a certificate of deposit.

RateWatch data show the rate on a standard 12-month CD currently sits at a laughably-low 0.515% APR, keeping savers away. Money stock in retail CDs has fallen by nearly half a trillion dollars since 2008. The last thing you want to do is lock yourself into a long-term CD at a low interest rate and then watch helplessly as interest rates go up.

Still, there are ways to invest in CDs while protecting yourself against interest rate risk. You could go with a no-penalty CD, which allows you to pull out of a CD contract if rates start to rise. Another option is the “bump” CD, and its variations, such as step-up CDs and rising rate CDs, which allow you to raise the rate of your CD if the interest rate market improves.

Even still, there’s another option, the CD ladder. In a nutshell, CD laddering involves taking out multiple CDs with staggered maturity dates – for instance, a one-year, two-year and three-year CD – which are then renewed or invested in another CD when it matures. Rather than tying up all of your money in a long-term CD and being stuck with a low interest rate for the duration, the CD ladder lets you reinvest money as it “comes off the books” – hopefully at a higher interest rate than you started with.

CD ladders are understandably popular with savers who get the return of a CD but with considerably more flexibility and insurance against interest rate risk. Most banks will help you build a CD ladder, though they’re easy enough to set up that you’re probably better off shopping around at multiple banks for the best rate at each term. There is one caveat, though. While most traditional ladders tend to include a longer-term CD (say, five years) that can earn a higher rate of interest as your short-term CDs mature and get renewed, that kind of long-term lock-in may be inadvisable in this interest rate climate.


“I would definitely recommend against [including a five-year CD],” says Mike Moebs, CEO of the economics consulting firm Moebs $ervices. “If a consumer wanted to go that far out, it’s better to go into a treasury bond or a bond fund.”

Of course, banks recognize that most people are unwilling to lock in their money for extended periods of time, which is why many banks will offer enticements – like including a bump-up option or linking the CD to a free checking account. When considering such perks, it’s important to keep a level head and determine whether the enticements are enough to make up for the interest you’ll lose by locking up your money for five years or more.

“If it reduces fees because it’s tied into a free checking account … It might be worthwhile,” says Moebs, before cautioning savers to do their homework. “Look at the details, ask questions and be patient. If it doesn’t look good, don’t do it.”

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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