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undefinedWhen it comes to financial planning for your short- and long-term goals, saving and investing are key components to help you build wealth. But after the Great Recession, some investors may feel a bit skittish about locking up so much cash in an uncertain economy. On the other hand, savings interest rates have been relatively low. So, what are you to do?

Luckily, there’s a strategy that can help you save and build wealth over time, without locking everything up long-term. By utilizing certificates of deposit (CDs) and creating a “CD ladder” portfolio, you can get competitive returns on your deposits while being able to access funds if needed. Read on to learn more about certificates of deposit and how CD laddering can benefit you.

What is a Certificate of Deposit?

A certificate of deposit (CD) is a unique way to save money and guarantee your principal. When you purchase a CD, you agree to keep your money in the account for a specific length of time in exchange for a fixed interest rate.

You can open CDs with various terms, anywhere from one month to several years.

According to the U.S. Securities and Exchange Commissionicon_new_blue.gif, “When you purchase a CD, you invest a fixed sum of money for a fixed period of time — six months, one year, five years, or more — and, in exchange, the issuing bank pays you interest, typically at regular intervals. When you cash in or redeem your CD, you receive the money you originally invested plus any accrued interest.”

CDs can be a great low-risk way to invest. By creating a CD ladder, you can typically benefit from the higher rates of a long-term CD, and set it up so that your deposits are due at different times — which gives you access to your money if needed.

What is a CD ladder?

As mentioned above, you can open CDs with various term lengths. Typically, the longer the term length, the higher the interest. The catch? When you purchase a CD, you agree to keep your money in the account until the maturity date. If you withdraw your cash before the maturity date, you could face penalties for doing so. Agreeing to a long-term length of five years may feel limiting, as your cash isn’t liquid.

That’s why the CD ladder approach can help savers build wealth while also having the benefit of flexibility.

Using a CD laddering strategy, you start low and build high. You can invest evenly in CDs of various term lengths, in order to get the benefits of higher interest rates, while also seeing a return on your shorter-term CDs sooner. A CD laddering approach could look like this:

$2,000 in a 6-month CD

$2,000 in a 1-year CD

$2,000 in a 2-year CD

$2,000 in a 3-year CD

$2,000 in a 4-year CD

As part of your CD laddering strategy, you’d reinvest the CD after your first term (in this case, your six-month CD) into a CD with the highest rates available in the market at that time, which is typically the CD with the longest term at the top of your ladder (in this case, your four-year CD). At the end of each term, savvy savers may be able to re-invest the CD as a high-yield CD.

Using the CD laddering approach can be beneficial, because it allows investors to take advantage of the highest CD rates while having accessibility to cash and interest in the shorter-term. In other words, all your cash won’t be locked up in higher-yield, longer-term CDs, and you’ll have more accessibility and flexibility in the short-term. It’s a win-win situation.

What you should know about setting up a CD ladder

If you’re interested in creating a CD ladder, you can pick and choose which terms (or length of time) you invest in. The key is to have a mix of shorter-term CDs, medium-term CDs, and longer-term CDs. When creating a CD ladder, think of how much cash you want to keep fairly liquid and how much you want to invest long-term.

Using a CD laddering strategy, you can build cash flow and get a return on your investment in a low-risk environment. CDs typically are less risky than other types of investments, while warranting a higher return than a simple savings account.

Some things to note about certificates of deposits are that they are FDIC insuredicon_new_blue.gif, and also the interest is considered taxable income by the IRSicon_new_blue.gif.

How to purchase CDs and set up a CD ladder

Certificates of deposits are available through banks, though rates vary depending on where you purchase them from (for example, here’s list of BMO Harris rates). In order to set up a CD ladder, you can purchase a variety of CDs at various term lengths so you can get the high-returns and produce consistent cash flow.

If you’re interested in setting up a CD ladder as part of your savings strategy, check out our current rates. Need additional support? Don’t worry, we’ve got you covered. You can stop by your local BMO Harris branch or give us a call at 1-888-340-2265 to get started today.
 
Related: CDs vs. money market accounts: Which one should you choose?

Banking products and services are subject to bank and credit approval. BMO Harris Bank N.A. Member FDIC.

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