If you do any amount of research into personal finances, you will eventually come across CD ladders.
At their simplest, CDs are Certificates of Deposit issued by financial companies. You give them money (of some specified minimum or more) for a specific length of time, and they pay you interest.
Because the interest rates are generally lower than returns you’d see in the stock market (and don’t always keep up with inflation), experts usually agree that it makes sense to use CDs for short-term savings goals, like 5 years or less. Though they aren’t as liquid as a high-yield savings account, they almost always have higher rates.
So my thinking was, buy a 5-yr CD each month for 5 years, and then use the maturing CDs to keep the ladder going.
Though there are banks with lower minimums, the average is usually $1k. Which means this strategy would amount to $60k.
And that’s when my brain short-circuited. My first thought was that if I had that much money, I’d put it in stocks, not CDs. I mean, $60k is one heck of an emergency fund.
But is it wise to build one this big?
There are a few considerations.
The interest is taxed like ordinary income (as opposed to the lower rates of long-term capital gains in the stock market).
But unlike the stock market, the money is risk-free as most CDs are FDIC insured.
Once the ladder is fully funded—all 60 CDs bought—it’d be self-perpetuating (assuming a principal $1k wouldn’t be needed for something when the CD matures).
Likely the interest would eventually be enough to purchase some of the CDs, too. (For simplicity’s sake): a 5yr CD at 3% would earn $150 before taxes.
60 of those equals $9k.
Just some food for thought.
And kudos to you if you can manage to save this much, or even half this much while also saving for retirement and still, you know, living your life. 😉