Shaping Your Financial Future

Shaping Your Financial Future

Short-Term CD Ladders: Extra Savings Without The Extra Wait

by Angie Wells

If you've been interested in certificates of deposit, but you don't have much in savings and haven't felt very good about tying up money for years at a time, look into short-term CD ladders. CD rates have been fairly low for some time now, with longer-term CDs not yielding all that much more than short-term CDs. That sounds bad at first, but it means you can look into shorter-term accounts without much loss. Taking advantage of this situation can help you increase your money without increasing your sense of restriction.

CD Ladders

The basic CD ladder example usually uses years. You set up five CDs, one for one year, one for two years, and so on. The idea is that when the first one matures, you turn it into a five-year CD. Then, the next year, you turn the two-year CD into a five-year CD. You keep doing that until you have five, five-year CDs, one of which matures each year. Even with low rates, you can clear a tidy sum of interest with this strategy.

However, that still means tying up money for years at a time. If you've got a low savings rate, that can seem daunting. Many CDs allow you to close the CD at any time with a loss of just the interest, so you're not losing access to your money completely. But the idea that "you can't touch the money" can still hang over your head and not make you feel very good from the start.

Shorter Terms

This is where short-term CDs come in. They let you increase your money a little while getting used to this rotating group of CDs. They also let you decide if CDs are right for you -- and if they are, you can gradually increase the time periods in the ladder until you have a typical five-year cycle happening.

Start with a three- or six-month CD, and add four more with durations that are multiples of what you choose. For example, one three-month CD, one six-month CD, one nine-month CD, one 12-month CD, and one 15-month, if you can find that. If not, an 18-month CD could work. When the three-month CD matures, turn it into another 18-month, or even a two-year CD, and keep doing that as each CD matures.

Keep your eye on interest rates. There's no guarantee that rates will rise, but if they do, then you can start getting CDs with the higher rates, eventually settling into the five-year cycle at those higher rates.

If you want to start planning a short-term ladder now, talk to banks in your area and see what their rates are. Ensure you go with a bank that doesn't take part of the principal if you decide to close the CD early. For more information, contact a bank such as the Rio Grande Credit Union.


About Me

Shaping Your Financial Future

A few years ago, I found myself in a tough spot. I was completely out of money, and my expenses kept piling up. I knew that if I didn't turn things around, I would be declaring bankruptcy for my business. To ward off financial disaster, I decided to invest a little time into learning how to budget. I made a few simple changes, including eating out less, paying attention to fines and fees, and avoiding excessive shopping trips. You wouldn't believe how quickly things changed. This blog is designed to teach beginners how to shape their financial future, so that you don't have to worry.