I Use A CD Ladder. Here's Why You Should, Too - The Motley Fool

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I Use a CD Ladder. Here's Why

You Should, Too
By Reuben Gregg Brewer – Jun 4, 2023 at 6:10AM
KEY POINTS
Interest rates have been moving higher over the past year or so.
Investors have been moving cash around to beneQt from increased
interest rates.
I set up a CD ladder years ago allowing me to automatically beneQt
without the need to lift a Qnger.
Simple solutions are often the best,

particularly when they can be set on
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autopilot. That's what I did with a CD

cookies to deliver our
services and to
ladder
informationand you can, too.
analyze traCc. We also
share
about your use of our
site with advertising
I'mother
and a big proponent
partners. of working smarter, not harder. Which is why I look for
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ways to put my life on autopilot. For investing, that means buying great
dividend-paying companies and setting dividends to be reinvested. For
Got it
cash, it meant setting up a CD ladder, which is paying off very well right
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now as interest rates head higher.
1 of 6 2023-07-02, 07:43
Here's why you might want to do the same thing.
Take the KISS approach

When you make things overly complex you are practically asking for
something to go wrong. When you make things highly manual, requiring
regular human intervention, you increase the opportunity for error and
neglect. Entropy, or the gradual decline into disorder, is very powerful and
should never be ignored. Which is why I'm always telling myself to "keep it
simple, stupid."
A hand planting money in the ground to show long term investing growth.
IMAGE SOURCE: GETTY IMAGES.
I don't think I'm stupid, that's just the saying. But I see the last "S" in the
KISS approach to life as a reminder that even I make mistakes that can be
avoided. This is one reason I put three months' worth of living expenses
into a savings account to provide an emergency cushion in case of an
unexpected life event. I did this years ago before interest rates on bank
accounts fell toward zero. At the time it was the simple way for me to
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ensure my family's Vnancial security and earn some interest along the
services and to
share information
And your
about thenuserates
of our started to head toward zero and it was just dead cash,
doing little to nothing other than providing a safety net. To be fair, that's an
and other partners.
important
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risky investments (like stocks or bonds) where I could
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lose money. But I did make an important change by initiating a certiVcate-
(CD)
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2 of 6 2023-07-02, 07:43
over 12 months to complete. It was worth it, and the rising interest rate
environment proves that.
What is a CD ladder?
In my case, I chose to break my emergency savings into six parts, and
with each part, I bought a one-year CD through my bank, which means
these savings are protected by FDIC insurance. CertiVcates of deposit
tend to have higher rates than savings and checking accounts at all times
because you are locking that cash into the CD for whatever the term of the
CD happens to be (one year, in my case).
I opened a new CD every two months, meaning I spent about a year

thinking and executing this project. Still, the actual time spent on making
this happen was very minimal. The CDs I bought are from a bank that
guarantees that its CDs will be among the highest-yielding in the market
and that automatically rolls over CDs when they mature at whatever the
prevailing CD rates are. Basically, I thought about this one time (for a year)
and I've never had to think about it again.
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MY OLD APPROACH VERSUS TWO TYPES OF CD LADDERS
services and to
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and other partners.
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Got it 1-Year 1-Year 1-Year 1-Year 1-Year CD

CD CD CD CD (September)
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3 of 6 2023-07-02, 07:43
MY OLD APPROACH VERSUS TWO TYPES OF CD LADDERS
Initial $5,000 $5,000 $5,000 $5,000 $5,000

amount

Alternative 1-Year 3-Year 5-Year

CD ladder CD CD CD
Initial $10,000 $10,000 $10,000

amount
CHART BY THE AUTHOR.
By breaking the maturities up, with a CD coming due every two months, I
ensure I can pretty much always have access to some of the cash without
too much trouble. You could set up a similar ladder by opening one CD a
year over several years or buying multiple CDs all at once but with
different maturities, say one-, three-, and Vve-year CDs. I wanted more
access to the cash and I wanted to ensure that short-term changes in
interest rates would show up quickly in my CD ladder.
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And that's happening today. To give an idea of the change, the interest I
services and to
earn each
analyze traCc. month
We also on one of my most recent CD rollovers increased by 4.5
share information
times!
about yourBut
use here's
of our the really important part: I didn't do anything to make that
happen. I set it up once, years ago, and now it is on autopilot.
and other partners.
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Over the past year, I've read news stories about consumers rushing to take
advantage
Got it of higher interest rates by pulling cash from low-yield accounts
and buying higher-yielding ones, including CDs. They are making the right
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4 of 6 2023-07-02, 07:43
decision, but if that's cash that isn't going to be used for a long time
(earmarked for emergency savings or an expense, like college, that may
be years down the line), taking a manual approach is the hard way to solve
the problem. When the situation changes again, which it will eventually,
the manual approach means you have to think and act again. I won't; if
rates keep going up, so too will the rates on my CD ladder.
Not perfect, but perfect for me

The bad part of this is that my CD ladder will also adjust downward if
interest rates fall. But there's really no way to avoid that without locking in
rates for extended periods, which I'm not willing to do (and which would
mean potentially missing out on a further rise in interest rates). You can
also argue that pulling cash out of a CD early generally involves penalty
payments, which is true. But if I need this cash for an emergency, that will
very likely be the least of my concerns. If you need it for college or some
other far-out expense, you'll have to think about the maturity dates of the
CDs a little more carefully.
Butwebsite
This to myuses
thinking, the beneVts easily outweigh the negatives because this
simple approach required me to set up only six CDs and now I'm done,
services and to
analyze traCc. We
essentially, also
forever. Meanwhile, I know that the interest I'm earning on this
share information
cashyour
about willuseroughly
of our keep pace with whatever is going on with interest rates
more broadly. This doesn't require huge sums of money and isn't
and other partners.
particularly
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strategically about something that may seem like a short-term problem. If
Got it
I can do that, anyone can.
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5 of 6 2023-07-02, 07:43
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Got it
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6 of 6 2023-07-02, 07:43

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I Use a CD Ladder. Here's Why You Should, Too | The Motley Fool https://www.fool.com/retirement/2023/06/04/i-use-a-cd-ladder-...

I Use a CD Ladder. Here's Why

Simple solutions are often the best,

autopilot. That's what I did with a CD

Here's why you might want to do the same thing.

Take the KISS approach

I opened a new CD every two months, meaning I spent about a year

Got it 1-Year 1-Year 1-Year 1-Year 1-Year CD

MY OLD APPROACH VERSUS TWO TYPES OF CD LADDERS

Initial $5,000 $5,000 $5,000 $5,000 $5,000

Alternative 1-Year 3-Year 5-Year

Initial $10,000 $10,000 $10,000

CHART BY THE AUTHOR.

Not perfect, but perfect for me

This website uses

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