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Does CD laddering still make sense or should you lock in a long-term rate now?
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CD laddering is a popular savings strategy in which savers spread their CD investments across CDs with different maturities. For example, instead of opening a $5,000 5-year CD, you may decide to open five different CDs, like a 1-, 2-, 3-, 4- and 5-year CD, each with a $1,000 deposit.
As each account matures over time, you have options: You can either use the money for something you need or open a new 5-year CD and continue earning. What’s smart about this strategy is that it ensures you have liquidity if you need it but also gives you the ability to reinvest if you don’t and earn big returns on your cash.
But while you can earn big returns on CDs right now due to today’s high-rate environment, that is expected to change. Experts expect the Federal Reserve to lower the federal funds rate later this year. And since that rate target is the primary benchmark for consumer interest rates, those reductions could cause CD returns to fall.
That, in turn, begs the question of whether CD laddering still makes sense. Or, should you open a long-term CD to lock in a high rate over the longer term instead?
Compare today’s leading CD rates to take advantage of the high-rate environment now.
Does CD laddering still make sense or should you lock in a long-term rate now?
“CD laddering has been a time-tested strategy for managing interest rate risk while maximizing returns in a conservative investment portfolio,” says Justin Stivers, financial advisor and founding attorney at Stivers Law. “A portion of funds become available for reinvestment at regular intervals, potentially capturing higher rates in a rising interest rate environment.”
But with the Federal Reserve expected to reduce its federal funds rate later this year, is a CD ladder the right strategy? Here’s when it is — and when it may not be.
When CD laddering still makes sense
“Right now, there is a bit of Russian Roulette with this strategy because the underlying question is, ‘When will the Fed start easing?’,” says Matt Willer, managing director of capital markets and partner at Phoenix Capital Group.
A few weeks ago, it appeared that there may not have been enough time before the potential Fed rate cuts for CD laddering to make sense, according to Willer.
“But some mixed signals from the inflation front may give Powell and the Fed pause to punt the rate decrease toward the end of 2024 as they digest more data,” Willer says.
In turn, CD laddering may still be a smart option.
“But come Q2, I’d start to think about locking in something a little more lengthy before watching rates erode,” Willer says.
And, this strategy can also help you maintain liquidity, Stivers says. Since the process involves opening CDs with differing maturities, liquidity events will happen at regular intervals, whether that’s semi-annually, annually or any other interval you set up.
Ultimately, the CD laddering “strategy suits conservative investors seeking steady income streams and protection against market volatility,” Stivers says.
Use a CD to earn more interest on your money now.
When it’s better to lock in a long-term rate
While CD laddering can still make sense, it may not be the best option in all cases.
For example, if you don’t need the liquidity generated through CD laddering, locking in a long-term rate could make more sense. While recent inflation data suggests that the Federal Reserve could wait a while to make rate cuts, experts still expect interest rates to start falling at some point in 2024.
Because CDs allow you to lock in your annual percentage yield (APY) for the entire account term, they can generate reliable returns for years to come, depending on the term length you choose.
“Locking in a long-term CD rate may appeal to investors seeking stability and higher yields in a low-rate environment,” Stivers says.
The bottom line
“Ultimately, the decision between CD laddering and locking in a long-term rate depends on individual financial goals, risk tolerance and market outlook,” says Stivers. If you believe interest rates will stay elevated for the near future or need regular income, CD laddering may still make sense. If you’re concerned about interest rates falling in the future and don’t expect to need access to your funds, locking in today’s high rates for the long-term may make more sense.
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California Gov. Gavin Newsom vetoed a bill Saturday that would have required new cars to beep at drivers if they exceed the speed limit in an effort to reduce traffic deaths.
California would have become the first to require such systems for all new cars, trucks and buses sold in the state starting in 2030. The bill would have mandated that vehicles beep at drivers when they exceed the speed limit by at least 10 mph.
The European Union has passed similar legislation to encourage drivers to slow down. California’s proposal would have provided exceptions for emergency vehicles, motorcycles and motorized scooters.
In explaining his veto, Newsom said federal law already dictates vehicle safety standards and adding California-specific requirements would create a patchwork of regulations.
The National Highway Traffic Safety “is also actively evaluating intelligent speed assistance systems, and imposing state-level mandates at this time risks disrupting these ongoing federal assessments,” the Democratic governor said.
Opponents, including automotive groups and the state Chamber of Commerce, said such regulations should be decided by the federal government, which earlier this year established new requirements for automatic emergency braking to curb traffic deaths. Republican lawmakers also said the proposal could make cars more expensive and distract drivers.
The legislation would have likely impacted all new car sales in the U.S., since the California market is so large that car manufacturers would likely just make all of their vehicles comply.
California often throws that weight around to influence national and even international policy. The state has set its own emission standards for cars for decades, rules that more than a dozen other states have also adopted. And when California announced it would eventually ban the sale of new gas-powered cars, major automakers soon followed with their own announcement to phase out fossil-fuel vehicles.
Democratic state Sen. Scott Wiener, who sponsored the bill, called the veto disappointing and a setback for street safety.
“California should have led on this crisis as Wisconsin did in passing the first seatbelt mandate in 1961,” Wiener said in a statement. “Instead, this veto resigns Californians to a completely unnecessary risk of fatality.”
The speeding alert technology, known as intelligent speed assistance, uses GPS to compare a vehicle’s pace with a dataset of posted limits. If the car is at least 10 mph over, the system emits a single, brief, visual and audio alert.
The proposal would have required the state to maintain a list of posted speed limits, and it’s likely that those would not include local roads or recent changes in speed limits, resulting in conflicts.
The technology has been used in the U.S. and Europe for years. Starting in July, the European Union will require all new cars to have the technology, although drivers would be able to turn it off. At least 18 manufacturers including Ford, BMW, Mercedes-Benz and Nissan, have already offered some form of speed limiters on some models sold in America, according to the National Transportation Safety Board.
The National Highway and Traffic Safety Administration estimates that 10% of all car crashes reported to police in 2021 were related to speeding. This was especially a problem in California, where 35% of traffic fatalities were speeding-related — the second highest in the country, according to a legislative analysis of the proposal.
Last year the NTSB recommended federal regulators require all new cars to alert drivers when they speed. Their recommendation came after a crash in January 2022, when a man with a history of speeding violations ran a red light at more than 100 mph and struck a minivan, killing himself and eight other people.
