How CD Ladders Can Help Investors Get More From Their Savings
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Here's your money briefing for Monday, May 1st. I'm Danny Lewis for The Wall Street Journal, filling in for J.R. Whelan. Between high interest rates and inflation, investors are flocking to safe long-term assets to grow their money. One of those are CDs, certificates of deposit. But while a lot of cash is going into CDs, there's a simple trick to get better and more predictable returns.
CDs are in a place right now where they are comparable to rates that you can get from an iBond or a treasury. And in some cases, CDs are actually outpacing treasuries when it comes to yields, especially for the short term.
We'll talk to Oyen Adedoyen from the Wall Street Journal personal finance team after the break.
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Investing right now can be really tricky given high interest rates, inflation and fluctuations in the stock market. So a lot of people are turning to long term options in hopes of writing out any instability. One of those are certificates of deposit.
What is driving renewed interest in CDs right now?
According to the Federal Reserve, balances and CDs swelled to more than $480 billion in February, up from $36.5 billion this time last year. And even those are still subject to interest rate changes. So if you decide to go that route, what's the best way to do it? Here now to discuss is Oyen Adedoyen from the WSJ's personal finance team. Oyen, simple question here. What is a certificate of deposit, also known as a CD?
A CD is a super safe asset that basically pays out interest over a set of times. So say an individual, an investor wants to put a certain amount of money away for a long period of time with a guaranteed interest level that it's going to gain over that time. They would use a CD to lock their money away for maybe say anywhere from six months to five years. and then be promised that at the end of that date, they would have a certain amount of money gained.
Why are certificates of deposit so attractive to invest in right now?
They're attractive to invest because of the high interest rates. So the Federal Reserve has been increasing rates incrementally in an effort to curb inflation. And so CDs are at some of the highest interest rates that they've been in 15 years, financial analysts say.
Now what does it mean for someone to set up a CD ladder? Can you walk me through what that might look like?
So a CD ladder is a little bit more complicated and it's less of a device to optimize your yield and more of a device to kind of take advantage of high yields that are existing right now. Because some of the highest yields on CDs are more short-term, an investor might want to spread their money out over a longer period of time to both take advantage of short-term yields, but still have money parked away for the longer term. So say example, you have $30,000 to invest. You want to make sure that money is available every six months or so, just to have flexibility. You can set up a CD where you put $10,000 in a six-month CD, another $10,000 in a one-year CD, and another $10,000 in a three-year CD.
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