NEW YORK (RateWatch) – It’s no secret that this a bad time to invest in a certificate of deposit.
RateWatch data show the rate on a standard 12-month CD currently sits at a laughably-low 0.515% APR, keeping savers away. Money stock in retail CDs has fallen by nearly half a trillion dollars since 2008. The last thing you want to do is lock yourself into a long-term CD at a low interest rate and then watch helplessly as interest rates go up.
Still, there are ways to invest in CDs while protecting yourself against interest rate risk. You could go with a no-penalty CD, which allows you to pull out of a CD contract if rates start to rise. Another option is the “bump” CD, and its variations, such as step-up CDs and rising rate CDs, which allow you to raise the rate of your CD if the interest rate market improves.
Even still, there’s another option, the CD ladder. In a nutshell, CD laddering involves taking out multiple CDs with staggered maturity dates – for instance, a one-year, two-year and three-year CD – which are then renewed or invested in another CD when it matures. Rather than tying up all of your money in a long-term CD and being stuck with a low interest rate for the duration, the CD ladder lets you reinvest money as it “comes off the books” – hopefully at a higher interest rate than you started with.
CD ladders are understandably popular with savers who get the return of a CD but with considerably more flexibility and insurance against interest rate risk. Most banks will help you build a CD ladder, though they’re easy enough to set up that you’re probably better off shopping around at multiple banks for the best rate at each term. There is one caveat, though. While most traditional ladders tend to include a longer-term CD (say, five years) that can earn a higher rate of interest as your short-term CDs mature and get renewed, that kind of long-term lock-in may be inadvisable in this interest rate climate.