Craving Some Yield….Consider Laddering CDs

Kate Hennessy |

By: Kate Hennessy, CFP®

Do you have extra cash on hand, sitting in a saving account at a bank earning a small amount of interest?  Do you have a CD maturing? 

If you have a specific goal in mind that will require a need for liquidity in the next 1 to 5 years, it is time to assess your choices.  For the past few years, most options for short-term, secure investments like bank accounts or CDs, offered very low interest rates, often not much higher than zero.  Recent increases in interest rates have created new opportunities for you, so it is worth putting in the effort.  Consider a CD Ladder or CD Barbell investment strategy.

By way of background, a CD or certificate of deposit is a fixed income investment that pays a set rate of interest over a specific time-period. The rate of interest earned from a CD is typically higher than the interest you would earn in a savings account.

Recently after speaking with a bank representative, we confirmed that the CD rates they were offering were not competitive.  We had a decision to make regarding a specific goal - saving for our children’s private secondary education. We knew we would need liquidity in two years when our soon to be 7th grader would be entering high school.  We didn’t want to lose any of the principal, but we did want to earn a reasonable rate of interest.  We made the decision to create a CD laddering investment strategy. 

A CD Ladder is an investment strategy where you divide an amount of money equally across different maturity dates/rates.  This investment strategy allows you to achieve your short and long term savings goals, while getting a higher return on your cash compared to a savings account. Here’s an example of a CD Laddering investment strategy:

Total Sum to Be Invested: $100,000

  • $33,333 invested in a 12month CD @ 2.25%
  • $33,333 invested in a 2year CD @ 2.85%
  • $33,334 invested in a 5year CD @ 3.25%

Equals an Average Maturity of 2.67 years @ 2.78%

As the above CDs mature, you can either reinvest in another CD or cash out the CD and pay for your goal. Besides the investment strategy highlighted above, there are other benefits to investing in brokered CDs within your brokerage account, such as the expanded FDIC protection.  Brokered CDs can be purchased from multiple banks (JPMorgan Chase, Goldman Sachs, Bank of America) and held in a single account, allowing you to expand your FDIC protection beyond the $250,000 limit.  In the event, that you need to liquidate (sell) a CD prior to maturity, you’ll receive the current market value of the CD.  If you plan ahead and invest across short, mid and long term CDs, your investment in the short term CD should provide you with enough short term liquidity so you don’t need to sell prior to maturity.

If you have a specific goal that requires liquidity in the short term, or just have some extra cash on the sidelines and want to earn extra yield outside of your savings account, contact us to see if a CD laddering or barbell investment strategy is right for you.