Rosalind Evans
When enhancing your emergency fund or working towards a short-term financial objective, a certificate of deposit (CD) ladder might be a beneficial tool in acquiring superior returns amid the volatility of interest rates.
The Federal Reserve’s recent series of interest rate hikes have caused other cash alternatives, such as high-yield savings accounts, Treasury bills, and money market funds, to be more competitive.
However, amid speculations of either a pause in interest rate changes or further rate hikes, specialists suggest that a CD ladder may be worth consideration.
“Such strategy is proven and reliable,” explained Ken Tumin, the founder and editor of DepositAccounts.com, a platform that monitors the most lucrative saving options. “It eliminates the need to predict future interest rate trends.”
A CD ladder strategy generally divides an equal amount of money into several CDs, each with different maturity dates. As shorter-term CDs mature, you can reinvest the earnings into longer-term CDs.
“A CD ladder offers a chance to reap diverse yields across different timeframes,” Mark Hamrick, senior economic analyst at Bankrate, pointed out. “If you’re pursuing the highest returns, this approach can be rewarding.”
Investors, for instance, might procure five CDs with maturity spans from one to five years, freeing up 20% of their initial investment each year.
Alternatively, a ladder can be created with shorter-term CDs, such as those ranging from three months to one year, offering increased flexibility.
Although shorter-term ladders provide quicker cash access without penalty, Tumin cautioned that the drawback might be missing out on locking in higher rates with longer-term CDs.
He noted that The decision largely depends on your financial objectives and the timeline for access to your funds.
Insights on Shorter-Term CDs
Generally, longer-term CDs yield higher returns than shorter-term CDs. However, due to the inverted yield curve, where long-term government bonds offer lower yields than short-term bonds, the current scenario is somewhat reversed, according to Tumin.
As of May 22, leading one-year CDs have an average yield of 5.26%, per DepositAccounts. These rates represent the top 1% average, whereas most five-year CDs yield less than 5% on average.
The Necessity for a ‘Diversified Portfolio’
Despite recent increases in CD rates, Hamrick underlined that some are still failing to outpace inflation.
In April, annual inflation was at 4.9%, a slight decrease from March’s 5%, per the U.S. Bureau of Labor Statistics report in May.
“In the long run, maintaining a diversified portfolio is crucial, particularly when saving for retirement,” Hamrick advised.
It’s vital to thoroughly examine your financial needs and goals before deciding on the best strategy. Although a CD ladder can provide more attractive yields and flexibility, it’s not a one-size-fits-all solution. As the financial landscape shifts, staying informed and diversified in your investment strategies is crucial to achieving long-term financial stability and growth.
