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Welcome back, fellow parent
Remember the days of flipping through your CD case, picking just the right album for the moment?
For me, it was usually a cross-section of Trapt and 50 Cent.
Weird combo? My parents thought so.
But what can I say? I was a bit Headstrong (dad joke landed 😬).
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Building a CD ladder is a lot like organizing those music CDs — except instead of tunes to headbang to, you're strategically arranging your savings to maximize your return.
The TL;DR
I get it - we're all busy trying to keep other humans alive. Here are the key takeaways from today's newsletter:
Certificates of Deposit, aka CDs, are a great way to earn a fixed return on interest for your cash. Plus they are FDIC-insured.
A CD ladder is when you stack multiple CDs with various maturity rates, providing access to your cash without closing one massive CD early and taking a penalty.
CDs are a great way to earn extra interest on cash you aren't planning on spending in the near-mid term. Most are offering rates around 5% depending on the terms.
How I’m Using CD Ladders
Tbh, I just collapsed mine. Why? I needed access to a portion of my cash because I was hoping to make a big purchase in the next month or two (more on this later).
Also, one of my high-yield savings accounts was recently increased to the same rate as a CD. I'm a long-standing customer and I think they're trying to prevent me from moving more cash to a competitor. Good move on their part, it worked.
That being said, I still have a CD with a few grand in it and will set up another ladder in the future. It's a great way to maximize interest earnings on cash in my emergency fund.
Quick View: Certificate of Deposit
A CD, or Certificate of Deposit, is a type of savings account that holds a fixed amount of money for a fixed period-of-time. CD terms can range from a few months to several years.
A quick search online will confirm that many financial institutions are offering around a 5% rate for a CD, typically for 9-12 month terms. While you may not think 5% is a big deal, consider these two things:
This is completely passive. You set it and forget it. Great place to store your cash you aren't planning on using in the next few months.
The FDIC confirmed the average savings rate is 0.46%. If you put $10,000 into this account, you'll make ~$46 in interest in a year. A CD at a rate of 5% for the same time-period will bring in $500.
Okay, cool. So what's a CD Ladder?
Glad you asked! A CD ladder is an investment strategy that involves dividing your total investment across multiple CDs with different maturity dates.
This allows you to take advantage of both short and long-term rate options, along with giving you access to chunks of your money at a time. If you keep all of your money in a single CD and then need to access your funds before maturity, you'll take a penalty for closing your CD early.
A CD ladder helps to prevent this. They are super easy to set up, here's the two-step process.
Purchase Multiple CDs: Research online for the best rates and terms for you. I invest with Marcus as they offer great rates for terms under a year. Purchase several CDs. For example, if you have $5,000 to invest in CDs, you can purchase a 7, 11, and 13-month CD. It all depends on what your investment goals are and when you think you'll need access to cash.
Reinvest: As each shorter-term CD matures, you reinvest the funds in a new CD with the longest term of your ladder (continuing the example above, this would be a new 13-month CD). This reinvestment step is repeated each time a CD matures.
