Use This Technique to Take Advantage of Rising Interest Rates

Interest rates are heading up, which will be a big relief to savers who’ve been making nearly nothing on bank accounts. To position your money for the best yield as rates continue to rise consider using the CD ladder strategy.

A CD ladder involves putting your cash holdings into a series of short- or medium-term bank certificates of deposit with staggered maturity dates. As each CD matures during the rising rate environment, you roll it over into a new one at a new higher-paying interest rate.

For help with a CD ladder or any other financial consideration, consider working with a financial advisor.

Current Interest Rate Environment

There’s no question about where interest rates are going, and that direction is up until higher rates slow the U.S. economy down enough to lower the rate of inflation from its current 8.5% level.

Since March, the Federal Reserve’s Open Market Committee has hiked the prime rate four times to 2.25% – including two jumbo-sized increases of 0.75% – after cutting rates to nearly 0% at the start of the global pandemic. Analysts are nearly unanimous that a third 0.75% boost is coming later this month after Federal Reserve Chief Jerome Powell vowed, “I can assure you that my colleagues and I are strongly committed to this project and we will keep at it until the job is done.”

Depending on where inflation goes, continued rate hikes of 0.25% to 0.75% are expected to continue during 2023.

How Interest Rates Impact CDs

Higher rates from the Fed translate into higher rates for savers, who’ve seen the average rate on a one-year certificate of deposit rise from a paltry 0.14% in December to 0.65% by September. At the high side of that average, rates on a one-year CD are now as high as 3%. (The rates cited here are all expressed in terms of what return they would yield during a one-year term, known as “annual percentage yield,” or APY.)

As the Fed continues to increase rates, those CD payouts will improve, too. That’s where CD laddering comes into play.

CDs are bank deposit accounts that pay interest for a fixed term, as long as the depositor doesn’t touch the money during that time. The maturity periods range from 30 days to as long as five years, with rates generally increasing with longer terms.

During a time when rates are rising, short-term CDs are the better bet until long-term rates catch up and peak. During the first week of September, for example, a one-year CD offered as much as 3% APY, while the best five-year CD rate was only marginally better, with an APY of 3.65%. By using short-term CDs, savers can capture the Fed’s future rate hikes as their CDs mature and can be rolled over into new, higher-paying certificates.

In addition to catching improved yields as rates rise, CD laddering preserves liquidity for your investment, as the staggered maturity dates ensure that you’ll have access to cash if you need it.

CD Ladder Investing Techniques

A saver with $10,000 in cash could build a ladder this way:

$2,500 in a three-month CD paying 1.75% APY
$2,500 in a six-month CD paying 2.5% APY
$2,500 in a 9-month CD paying 2.05% APY
$2,500 in a one-year CD paying 3% APY

As each CD matures, it can then be rolled over into a one-year CD, with each certificate paying 3% (or more when rates rise), and with one of them maturing every 90 days to preserve your liquidity. Once rates reach a peak, you can choose to lock in higher rates for longer periods, up to five years. In early 2000, for example, some five-years CDs returned as much as 6% APY, but ranged between 3.75% and 0.25% between 2005 and the start of the pandemic.

While a CD ladder can help maximize your returns from FDIC-insured bank accounts, even rising rates are unlikely to keep up with inflation and, once rates peak, you’re maturing certificates will roll over into lower-yielding CDs. For investors looking for growth rather than safety and liquidity, stocks and other more aggressive investments are likely to offer better performance.

The Bottom Line

CD ladders are a low-risk way to earn interest while maintaining liquidity. With interest rates on the rise, a CD ladder is an especially solid investment right now as you can continue to reinvest as rates continue to go up.

Investing Tips

For help with building a CD ladder, consider finding a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
A money market account is another low-risk option for storing cash that still earns some interest.