T HERE COULD BE a recession coming. Or not. Inflation could skyrocket again. Or not. The economic future is impossible to accurately predict and is certainly out of our control. There is, however, one thing smart savers can do: Optimize the interest rate on your savings. A growing number of savers are doing this with Certificates of Deposit (CDs), specifically by employing a strategy known as CD laddering. This enables them to take advantage of high interest rates without locking up all of their funds at once. Building a CD ladder is easy. You simply take the total amount you would normally put in one CD and break it out across several CDs of varying commitment lengths and with different maturity dates. The benefits of CD laddering Interest rates on even short-term CDs are surprisingly strong right now. As of this writing, rates in the 4% to 4.75% range are not uncommon for six- and nine- month CDs, with 12-month CDs offering even higher rates. Because of this, people are seeing them as a viable investment option that allows them to earn a good rate of return without a long-term commitment. In addition, by staggering both the term length and the maturity date, money becomes available throughout the year rather than all at once. When
and cuts. When the Fed takes a pause on hiking rates, some forecasters predict that CD rates will then soften. That said, there are indications that the Federal Open Market Committee will begin to lower rates this year. This provides savers with a strong incentive to invest in short-term CDs now to take advantage of rates while they are still high. Is a CD ladder right for you? Many people who’ve adopted the CD ladder strategy are looking to earn a high yield for their money while maintaining a level of liquidity that can help them meet approaching life events, such as an impending retirement or a child’s graduation. According to Chikako Tyler, chief financial officer at California Bank & Trust, “Astute investors who watch forward interest rates will likely want to take advantage of locking in higher-yielding, safe investments while they can. It’s always important to remember that no one can predict interest rates, so it is essential to diversify.” Consider before committing Investing in a CD means that you are willing to tie your money up for the length of the term, be it three, six, or nine months or longer. Be aware that if you take a withdrawal before your CD matures, you will pay a penalty fee. If you need greater flexibility
a CD matures, you have the option of taking the cash for other uses or reinvesting it into a new CD. Looking ahead How long will CD rates remain at their current high levels? CD rates respond to, or reflect, the Fed’s rate hikes
than what traditional CDs offer, no-penalty CDs are available. They generally don’t pay as high a rate as standard CDs, but the best ones are competitive with them and worth considering.
“It’s always important to remember that no one can predict interest rates, so it is essential to diversify.” Chikako Tyler
Chief Financial Officer, California Bank & Trust
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