How to set up a CD ladder for your emergency fund (and why you would)

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This financial movement takes a little work, but it is perhaps the best way to maximize the interest of your emergency fund during times of high inflation: it is called a CD scale—A series of overlapping certificates of deposit that expire at different times so you have a constant flow of cash that always benefits from long-term interest rates. This is how it works.

What is a certificate of deposit?

CDs are actually quite simple: you give a lump sum of money to a bank in exchange for not making a withdrawal for a set period of time, between three months and five years. In return, you can lock in an annual interest rate for that term (the longer the term, the better the rate).

The advantage of CDs is that they are considered a safe way to store your money, and they are generally earn more interest than checking, savings and money market accounts (currently it is closer to 1% APY, compared to 0.50% APY). The downside to CDs is that there is a charge for early withdrawal of money that will essentially wipe out any interest you have accrued.

Okay, but what is a CD ladder?

A CD ladder is a savings strategy in which you put money in multiple long-term CDs with staggered expiration dates so that you have a constant flow of money at regular intervals without having to withdraw from. money earlier. For example, with $ 10,000, a CD ladder would look like this:

  • $ 2,000 in a one-year CD
  • $ 2,000 in a two-year CD
  • $ 2,000 in a three-year CD
  • $ 2,000 in a four-year CD
  • $ 2,000 in a five-year CD

Then when the CDs mature, you put that money into a five-year CD, like this:

  • $ 2,000 (plus one year of interest) in a five-year CD
  • $ 2,000 (plus two years’ interest) in a five-year CD
  • $ 2,000 (plus three years of interest) in a five-year CD
  • $ 2,000 (plus four years’ interest) in a five-year CD
  • $ 2,000 (plus five years of interest) in a five-year CD

By doing this, you are maximizing long-term interest rates, while giving yourself some flexibility to use the money if you need it, as a CD will expire each year. (For the best CD interest rates in September, check out this Bankrate post).

There is some risk to this, as you won’t have all of your cash on hand unless you want to cash out sooner and lose interest on the principal. For this reason, you can only put part of your emergency fund in a CD ladder.

Why shouldn’t I put this money in stocks?

Two reasons: risk and liquidity. There is always a risk that you will lose your money investing in stocks, and it may not always be easy to sell your stocks at a great rate when you are in an emergency. More, you always want some money on hand, apart from your investments.

At the end of the line

While a CD is less liquid than a savings account (which allows withdrawals without penalty), it will earn more interest. Of course, interest rates are very low right now, so it might only add a few hundred dollars to your cash reserves, but it’s better than nothing. You can play with that CD Scale Calculator to see if it’s worth it for you.


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