Building a high-yield emergency fund is vital to our long-term financial survival. As various markets (crypto, commodity, stock, real estate) fluctuate over time, we use our savings fund as a source of reliability, dependability, and consistency.
Today, I want to discuss one more option to put in our emergency fund toolbox—the CD ladder. Welcome back to the Investing for Interest series (101, 102, 103, 104, 105, 106, 107), where we talk about everything “fixed income.”
What is a CD Ladder? I talked briefly about Certificate of Deposits (CDs) in “Investing for Interest 102: Super Safe Savers.” CDs are debt instruments where you lend a bank your money for a certain amount of time for a fixed amount of interest.
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For example, you may lend the bank $2,000 in a CD for two years at 3% interest. This guarantees your interest for this time but also locks your money into the CD. This is akin to staking in the crypto world.
A CD Ladder is when you buy multiple CDs over time to ensure you continue getting reasonable interest rates. For instance, you may purchase a CD every six months, and their duration could be one year.
Why are CD Ladders important? We never know how interest rates will fall in the future. Sometimes we are in low-interest-rate environments (1-2%), medium (3-5%), or high (6%).
You want to have the flexibility to invest at the best interest rates available. If you release your CDs every six months to a year, you’ll have the opportunity to reinvest at better yields. If yields are lower, you can invest your money into another instrument.
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For example, you buy a $3,000 CD at 5% for three years. That’s a pretty good yield, but there’s no guarantee that you will get this yield in three years.
Therefore, it may be prudent to buy another of the same CD in six months, just to lock in those rates. When the CD matures, interest rates might only be 3%. CD Ladders offer you the opportunity to re-evaluate your interest rates often.
CD Ladder vs. a high-yield savings account. CDs are less accessible than your standard high-yield savings account (HYSA). You should always have a decent-sized HYSA ($3,000) before entering into a CD contract.
Your HYSA account can vary its interest rates at any moment. I started my HYSA at 2.2% interest and watched it slowly decrease its interest rate to 0.4%. Today, it is at 0.9%.
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With CDs, you have more control of your interest rates but less access to your money. That’s why you want to use both in tandem.
CD Ladder vs. Series “I” Bonds. Using dollar-cost averaging into savings bonds, you are basically creating a CD Ladder. However, the term is 30 years.
As your savings bonds mature, you could re-invest them into more savings bonds or other debt instruments. The money in Series “I” Bonds is more accessible than CD Ladders, but only after the first year of issue.
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Again, I would use these two techniques in tandem with the Series “I” Bonds serving as more of a hedge against inflation. The CD Ladder is a way to keep your emergency fund growing slowly.
CD Ladder vs. 30-year Treasury Bonds. These two instruments serve a distinct purpose. 30-Year bonds will give you income every six months. You can use them in your emergency fund and receive interest payments directly to your account.
If you use them in tandem, understand one is for income, and the other is for emergency fund usage. You can always sell your bonds, but I would rather keep that income rolling in consistently if you get a good interest rate (say 5%).
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CD Ladder vs. USDC. USDC is a stable coin cryptocurrency you buy on a centralized or decentralized exchange. A CD Ladder is something you purchase at a bank you trust.
CDs are also insured by the Federal Deposit Insurance Corporation (FDIC), meaning this agency protects you against loss. So the main difference outside of interest rates (9% of USDC) is risk tolerance. You want to understand your goals, timelines, and risk tolerance when you use these in tandem.
CD Ladder in your emergency fund. I just went through the checklist of the various debt instruments in your emergency fund. Here is the order I would use to invest in these products and the reasoning.
- Standard savings account (low interest, fast access)
- High yield savings account (higher interest, quick access)
- Series “I” Bonds (inflation protection, fast access)
- CD Ladder (interest rate protection)
- 30-Year Bonds (safety, income)
- USDC (high-interest rates)
Is a CD Ladder right for you? If you are new to investing and earning interest, this is the perfect vehicle for you. You’ll learn how to follow interest rates and make money decisions.
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A CD Ladder will get you in the habit of giving each of your dollars an assignment. After building a CD Ladder of 3-4 CDs, you may want to try it with 30-year bonds.
Bonds will pay you the interest, not just let it accumulate. At that point, you’ll understand the power of cash flow. So, CD Ladders are a gateway to a bigger world of finance, interest rates, cash flow, and passive income.
Conclusion. CD Ladders are for everyone. Investing money with people you trust and where your money is insured is always good.
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Interest rates are rising, but we don’t know for how long. If you find CD rates over 3%, you may want to jump on those quickly. Yes, inflation is over 8%, but you must consider your risk tolerance and comfort level.
I am comfortable buying Mortgage REITs at 10% yields, or you? If not, your 3-4% CD Ladder may be all the risk you can handle. It’s much better than leaving your money in a standard bank account at 0.1%.
Keep an eye on the Federal Reserve Funds Rate to see where interest rates are heading. Also, the 10-Year treasury note and mortgage rates are good indicators. CD Ladders are your gateway into a larger, more complex, yet crucial financial world—time to start.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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