Model a Certificate of Deposit (CD) ladder strategy to visualize your investment growth and liquidity over time.
A CD ladder is a strategy where you invest your money across multiple Certificates of Deposit (CDs) with different maturity dates. Instead of locking all your money into one long-term CD, you split it up. For example, with $10,000 and a 5-year ladder, you would put $2,000 into a 1-year CD, $2,000 into a 2-year CD, and so on, up to 5 years. As each shorter-term CD matures, you reinvest the money into a new 5-year CD. This strategy provides the high interest rates of long-term CDs while giving you regular access to a portion of your money.
What are the benefits of a CD ladder?
The main benefits are: 1) Higher Returns: You can take advantage of the higher interest rates typically offered on long-term CDs. 2) Liquidity: Since one CD matures each year (after the initial setup), you have regular access to your cash without paying early withdrawal penalties. 3) Flexibility: When a CD matures, you can either reinvest it or use the cash if you need it. It also protects you from being locked into a low rate if interest rates rise.
Are there any downsides?
The primary downside is that your money is still less accessible than in a regular savings account. If you need to access funds from a CD before it matures, you will likely face an early withdrawal penalty, which could negate your interest earnings. Also, CD rates may not always keep pace with inflation.