Savvy CD Investors Will Use This Easy Strategy for Big Gains in 2024

If you're trying to decide if 2024 is a good time to invest in certificates of deposit (CDs), there is a special strategy that can help you improve your chances of getting the best yield on your savings. It's called a CD ladder.

Instead of just opening one CD, a CD ladder lets you buy a diversified mix of CDs, with different terms and yields. Just like it's often better to diversify when buying stocks, putting your money into multiple CDs at once can help you improve your chances of getting a higher yield on your cash savings.

Let's look at how a CD ladder works, why it's a good investment, and how much you can earn with this CD strategy.

How a CD ladder works

CD laddering lets you put your cash into a mix of CDs, some with shorter terms (three to six months), and others with longer terms (one, two, to three years or more). You can even use multiple banks or credit unions to build your ladder. All of the different CDs in your ladder will pay different yields, based on the term. The CD ladder lets you lock in higher APYs on a few longer-term CDs, while holding on to flexibility and liquidity of your cash with shorter-term CDs.

For example, let's say you have $10,000 of cash, and you want to put it into a CD ladder based on some of the best CD rates today. Here's what a CD ladder might look like:

With this CD ladder, instead of putting all $10,000 into one CD, you spread your cash across a diversified portfolio of CDs -- with terms as short as three months or up to three years. There's no one right way to build a CD ladder. Some people might prefer longer-term CDs of five years or more; other people might want a mix of short-term CDs, like three months to 18 months.

But the goal of a CD ladder is to maximize the long-term yield on your savings, while giving you short-term access to some of your cash. It all depends on your personal finances, investment goals, and risk tolerance.

Why a CD ladder is a good investment strategy

A CD ladder is a good strategy for investing in CDs, because it can give you the best of both worlds: earning higher yields on your savings, and more flexibility and accessibility for your short-term cash. CD ladders might be especially useful in 2024, in case the Fed cuts interest rates later this year.

In case interest rates go down, APYs on savings accounts (and short-term CDs) will go down too. Building a CD ladder can give you a chance to lock in some good APYs on longer-term CDs. And what if the Fed doesn't cut interest rates? In case interest rates stay the same, or even go up, you can keep buying new short-term CDs at higher APYs.

Building a CD ladder can help you hedge your interest rate risk and keep earning a good yield on your savings, no matter what the Fed does at its next meeting.

How much you can earn with a CD ladder

CD laddering helps you earn more when you can get higher APYs on longer-term CDs. Let's look at an example of how a CD ladder can maximize yield while preserving your options for how to use your cash.

Let's say you have $20,000 to invest in CDs, and you decide to put the money into four different CDs with the following terms and APYs.

According to our calculations, this CD ladder would help you earn $214 more than you would get from putting all your money into a 3-month CD and rolling it over every three months.

But keep in mind that CD ladders do not always deliver the highest yields on your savings. If you can get higher APYs on short-term CDs, this might give you a bigger return on investment than spreading out your cash across longer-term CDs in a CD ladder.

However, if the Fed cuts interest rates by the end of 2024, short-term CDs will likely offer lower APYs than they do as of February 2024 -- and CD ladders could become a better investment. As with so many other aspects of investing, CD ladders are often a matter of timing.

Bottom line

If you want to get the highest yield on your savings, opening a CD could be a good choice. But another way to maximize yield is to use a CD ladder. By putting your cash into multiple CDs with different yields and terms, you can improve your chances of getting the best yield, while keeping some of your cash easily accessible for emergencies or other investment goals.