The Federal Reserve’s inflation-busting rate hikes over the past year have created an opportunity for Americans to earn major annual percentage yields, or APYs, on their savings by creating what's called a deposit “ladder.” Laddering is a low-risk investment strategy that involves splitting money between certificates of deposit (abbreviated CDs) with different maturity rates to enjoy a steady stream of savings over time.
A CD is a federally insured savings product that holds a fixed amount of money for a set interval of time, usually ranging from three months to five years. As the CD gets closer to its end date, or matures, you earn guaranteed interest on your deposit.
Certified financial planner Joe Kelly tells Money that because of the inverted yield curve — which occurs when short-term interest rates for bonds are higher than what's expected in the long term — investors can now capture higher yields with shorter-term CDs without having to worry about where interest rates will go in the future.
You can then use the interest as cash, reinvest it in another CD to extend the ladder, put it into other investment or stash it in other savings accounts.
“It's quite an interesting time to invest and make a return that's greater than inflation so that our purchasing power is increasing,” Kelly says.
Given the impact inflation has had on Americans’ savings, laddering amid high interest rates could help many rebuild their funds.
The last few years have been a financial roller coaster. In April 2020, as COVID-19 lockdowns spread and Congress distributed its first stimulus checks, the U.S. personal savings rate jumped to 33.8%. That was the highest ever recorded — and almost 25 percentage points higher than a year prior, according to St. Louis Federal Reserve data.
The phenomenon, however, was short-lived. Inflation quickly depleted the money Americans squirreled away in the early months of the pandemic. The personal savings rate is up to 4.3% as of June from its summer 2022 low of 2.7%, but the last time rates were at these levels was during the housing crisis in 2009.
How CD laddering works
Unlike a regular savings account, the money you put into a CD isn’t liquid — you’ll have to pay a penalty if you decide to withdraw cash sooner than the established maturity date.
Many CDs also have a minimum deposit requirement, often between $500 and $2,500. So if you think you may need the cash you plan to invest before it fully matures, or you don’t have much to deposit at all, a CD ladder might not be the best option for you.
Usually, the longer you wait for an investment to mature, the more your money grows. But thanks to the Fed’s recent interest rate hikes, shorter-term CDs are currently offering the highest APYs, with some offering rates as high as 5.9%.
The CDs with the highest rates, and therefore those most ideal for laddering, range between three months and three years, Kelly says. The top one-year CDs are averaging 5.5% APY as of July, according to DepositAccounts.com, and the national average sits at 3.6%.
Even amid uncertainty about the Fed's next moves, that's impressive.
“Right now, a two-year ladder can average to a 5% annual return,” he says. “When you look at the long-term return of the stock market, the return is about 8% net. Why take the risk when you can have a guarantee?”
Why should I ladder?
Laddering multiple CDs with various maturities instead of putting all your money into one longer-term CD offers several benefits. First, you can take advantage high short-term interest rates when they occur while enjoying the stability of longer-term CDs.
Having a mix of CDs also gives you a reliable cash flow as your CDs mature. Rather than waiting for a single five-year CD to grow, you can access some of your money sooner without penalty — which is good news if you find yourself with an unexpected expense. Being able to withdrawal your cash faster also means you can reinvest it in a new CD and generate more interest on your savings in less time.
Let's say you split $10,000 evenly into the following CDs with these high APYs:
- $2,000 in a three-month CD with 5.2% APY
- $2,000 into a six-month CD with 5.8% APY
- $2,000 into a one-year CD with 5.25% APY
- $2,000 into a three-year CD with 5.92% APY
- $2,000 into a four-year CD with 4.85% APY
Your investments would earn about $26, $57, $105, $368 and $534, respectively. Whether you renew that money into a new CD or spend it, you're getting more liquidity than you would putting all your eggs in one basket.
Can I ladder with other savings products?
Other fixed-income products like certain Treasury securities and money market accounts can also be good options for laddering based on current interest rates.
Charles Sachs, a CFP and chief investment officer at Kaufman Rossin, says money market accounts are appealing for their liquidity and Federal Deposit Insurance Corporation (FDIC) insurance, although they do typically require a minimum deposit. Money market accounts allow customers to earn interest on the money they deposit, but unlike with a CD, you can access these funds right away at no penalty. You can typically withdraw from a money market account with a debit card or a check when needed, all while growing whatever money remains in the account.
These returns are usually lower than those generated by CDs, but they're still higher than normal. (“Most folks are used to getting paid almost zero for any money in their savings account,” Sachs says.)
When interest rates spike, demand for certain government securities typically goes up, and for good reason: Not only are they backed by the U.S. Treasury Department, but like with CDs, investors can benefit from high yield in the short term. Treasury bonds are typically long-term investments that mature after 20 or 30 years, but Treasury bills (or T-bills) offer shorter terms under a year.
While you may not earn as much with a T-bill as you would with a CD, the current average APY is about 5.4% for a three-month T-bill, according to U.S. Treasury Department data — so you can still ladder with them and take advantage of high short-term yields if you have the cash flow.
Regardless of which route you take, fixed-income savings products are stable, offer more interest that traditional savings accounts and can help diversify your portfolio if you also have other investments.
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