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If you’re a fan of CD laddering, you’ve probably been enjoying the high annual percentage yields (APYs) of 2023 and 2024. However, with the Federal Reserve signaling its intention to cut rates in 2025, you might be wondering if it’s still a viable savings strategy. You won’t get the high CD rates you might have gotten, but starting a CD ladder now and locking in rates before they drop can guarantee a higher rate of return on your maturing CDs than if you wait.
Key Takeaways
- A CD ladder includes multiple CDs that mature on different dates, although they’re funded equally.
- CDs are considered safe financial investments because you’re guaranteed a specific percentage yield based on your deposit and the CD term length.
- Establishing a CD ladder when interest rates are high can earn you more over time if interest rates fall.
How Does a CD Ladder Work Anyway?
A CD ladder includes several equally funded CDs with different maturity dates. This investment strategy can help you take advantage of high APYs, but it also offers the convenience of liquidity since you steadily have CDs maturing at different times. As a CD in your CD ladder matures, you can decide to reinvest the funds or take them out without a penalty.
For example, you can have a continuously maturing CD every year by establishing a ladder like this: Open 1-year, 2-year, and 3-year CDs simultaneously with equal amounts of money in each. When the 1-year CD matures, reinvest it into the next longest CD term. Do the same when the 2-year CD matures the following year, and so on. This process guarantees that one of your CDs matures every year.
Unlike standard savings accounts or money market accounts, the best CDs typically offer higher percentage yields. Plus, the rates are locked in for each CD term, so you’re guaranteed a specific return on your investment. Savings and money market accounts can’t say the same thing. The top CDs for each term also boast APYs as much as two or three times greater than FDIC averages:
Is Anything Changing With CDs in 2025?
Interest rates have been high since the Fed began fighting inflation, but as inflation eased, the Fed began cautiously cutting rates. It cut rates by a full percentage point between September and December 2024 but held rates steady at its January 2025 meeting and anticipates fewer cuts for the year.
The rate cuts that do happen in 2025 are expected to be small. Fed committee members indicated in December 2024 that they expect a slower pace for 2025 rate cuts, with the median prediction being a 0.75% reduction for the year. This means the interest earned by CDs likely will remain high, making it a good time to establish a CD ladder, especially if you do it before the Fed cuts rates.
Falling Interest Rates Could Impact Your CD Ladder
When interest rates fall dramatically, banks and lenders offer lower returns for investments like CDs. If you wait to establish a CD ladder and rates have dropped, you might not get as much out of the CDs or you may have to fund them for longer in order to get a better return.
If interest rates fall, you might find that the CDs you can reinvest in have lower percentage yields than the ones you initially took out. That is a disadvantage of taking out a CD, but remember that rates can be unpredictable. If interest rates rise, you might be able to reinvest one of your short-term CDs for one with a better percentage yield when it matures.
The Bottom Line
CD laddering as a financial strategy can be worth it for savvy savers since you’ll still earn modest yields and have more flexibility when it comes to accessing your funds. However, if interest rates drop, be prepared to reinvest your mature CDs at lower rates. You may even have to choose CDs with longer periods in order to earn the best yields.