Can using a CD ladder strategy keep your assets more liquid?

The financial strategy of creating a CD ladder can promote liquidity in your portfolio.

“Laddering CDs – that is, buying CDs with varying maturities, say in one month, three months, six months and one year – can be a powerful way to develop a cash base for money where you’d like a little extra return on top of an interest-bearing checking or savings account, but don’t need the money for an expense today,” Rob Williams said. .

Williams is Managing Director of Financial Planning, Retirement Income and Wealth Management at the Schwab Center for Financial Research.

THE ADVANTAGES AND DISADVANTAGES OF LIQUIDITY

To create a CD ladder, you invest your savings in CDs with varying maturities and interest rates. This approach can provide the opportunity to take advantage of higher rates on longer-term CDs while keeping some of your funds in shorter-term CDs that will be more readily available, said Matthew King, wealth planner for Wilmington. Trust.

“Guaranteed a fixed rate of return on invested capital over a fixed term and the ability to access funds when needed are the primary benefits of using CD ladders,” King said.

A couple uses a laptop in their living room to review their financial budget. (iStock/iStock)

It is also important to mention that early withdrawal penalties could apply if you break the CD before its maturity date.

“Often the penalty can result in a flat fee for breaking the CD contract as well as a penalty based on a number of days of interest calculated at the current rate on the CD,” King said. “These penalties may vary depending on the time remaining until the declared maturity of the CD.”

HOW MUCH CASH SHOULD HOUSEHOLDS KEEP CASH, AND IN WHAT FORM, FOR EMERGENCIES?

This is how it works

By creating a CD ladder, you invest your CDs to mature on different dates.

“This allows you to permanently have CDs maturing against all your funds committed to an investment that will repay the proceeds you invested, plus any interest you earned, at some point in the future” , King explained.

Money

Man counting money, saving concept, money allocation

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But, the tradeoff of investing using CDs is that you don’t have the ability to generate higher returns that may be available from other investments such as bonds or stocks, and the rates earned by CDs may not allow your investments to keep pace with rising inflation. , said King.

Consider King’s example of a CD ladder when considering your own need for cash and how long you’re willing to commit the funds. If, for example, you have $100,000 to invest and want a CD ladder with an average maturity of 18 months, here’s how it could be constructed:

$20,000 in a 6 month CD earning 0.55% APY

$20,000 in a 1-year CD earning 1.00% APY

$20,000 in an 18 month CD earning 1.05% APY

$20,000 in a 2-year CD earning 1.15% APY

$20,000 in a 30 month CD earning 1.25% APY

The “APY”, or Annual Percentage Yield, is the rate of return on an interest-bearing account for a period of one year based on the interest rate and compounding frequency.

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When planning your CD ladder, Williams advises matching CD maturity with when you need cash.

“In the meantime, you’ll earn a bit of extra return compared to a checking account, and you’ll have money for an emergency or anticipated spending in your wallet, as an investment or to spend when you need it,” a- he declared. .

Jack L. Goldstein