An alternative to CD lock-in: a “ladder”


I don’t think CDs (certificates of deposit) are worth the bargain. You often (but not always) get a slightly higher interest rate than an equivalent savings account, but at the price of liquidity, in that you have to leave the money in the account for specific amounts of time. It feels like the worst of all worlds.

But what if you have access to a particularly good rate with a CD, and you’re interested in the guaranteed return? Is there a way to get the upside (increased rate) without the downside (illiquid funds)?

There is a way, and it’s called a “CD ladder”. It’s actually quite clever.

There are, as I see it, two types of ladders, a rolling ladder, and a flexible ladder. Both have advantages.

Rolling ladder

The idea behind a rolling CD ladder is that you create multiple CD accounts with different maturation dates that overlap, so that you have “rolling” maturity dates.

  • Take a short-term example: there exist 6 month CDs. You could create six of them, put one-sixth of your money into each of them, and acquire them at a rate of one per month. This way, every month, a new CD would mature, and you would have access to that one-sixth.
  • Or a longer-term example: Given a 60 month (five year) CD, you could create five of them, one each year, and have one-fifth of your money mature each year.

The advantage of this rolling ladder is that you get regular access to your money, while still benefiting from the CD rates.

The downside is increased hassle, because now you have six times as many accounts to manage. And also, your situation still isn’t entirely liquid, as there will still exist times where you won’t have access to you money.

For this reason, CDs are not a good place to put your emergency fund.

Flexible ladder

I might be stretching the ladder analogy here, but you could also have multiple CDs with different terms.

You could open a 6 month CD, a one year CD, and a two year CD, and put a certain amount of money in them. The 6 month CD will mature more frequently (obviously) and so is more liquid than the other CDs, which would presumably have a higher interest rate.

CDs available at my credit union

The same upside of flexible funds and downside of increased hassle is here too though. It just gives you a few more options.

Is it worth it?

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] CDs combine many unfortunate characteristics of the various consumer financial products out there: decreased liquidity and also decreased earning potential.[/perfectpullquote]

READ MORE:  Is a CD worth it?

Do these tactics make a CD more viable? Yes.

Do these tactics make a CD worthwhile? In general, no.

CDs combine many unfortunate characteristics of the various consumer financial products out there: decreased liquidity and also decreased earning potential.

In general, you can find a more liquid product out there for not much less of an interest rate (such as with an online savings account). And you can get a much higher rate by investing your money and relinquishing liquidity.

But if you’ve got a special situation, a very high CD, and a reduced tolerance for risk, it’s still an option for you. I’ll pass, though.

But enough about me. Have you found a good use for CD these days?

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