Maximize higher interest rates on long-term CDs


MONEY-SAVING MOMENT: I’ve talked in the past about the idea of laddering CDs as a way to maximize the return on your money. But now Money Adviser has a different take on laddering that I want to share with you.

First, though, let me give you a little background on what I’m going to discuss. The basic concept behind laddering is that you take your money and split it into 5 even piles. Then you buy the following:

  • 1-year CD
  • 2-year CD
  • 3-year CD
  • 4-year CD
  • 5-year CD

The idea is that every 12 months when a CD comes due, you then turn around and re-up that money into a 5-year CD. So you always have access to 20% of your money being rolled over at what hopefully will be higher interest rates in the future.

Right now, there’s such a huge spread between short-term CD rates and 5-year CD rates. As I write this, the national average for a 5-year CD is 2.28% and 1-year CDs are paying 1.02%. (You can check rates at or let small community banks and credit unions bid for your CD business at

OK, so listen to this idea. Money Adviser says to take your money and buy 5 different 5-year CDs with it. So let’s say you do that today and lock in at 2.28%. Then let’s say 6 months down the road, the rates start moving up or you need some of your money right away.

The typical CD contract only calls for a 90-day interest penalty. So if you hold a CD for any length of time, the higher return on a 5-year CD will more than compensate for the forfeit of 90 days interest.

Just be careful because some banks are becoming savvy to this technique, so make sure the CDs you get only call for the standard 90-day interest penalty. Do that homework upfront and this could work out nicely for you.

I’ve been asked, ‘Well, why not buy just one 5-year CD instead?’ Here’s why: If you just need a portion of the money, you have to cash the entire CD in and start over again. Having 5 different ones gives you the same kind of flexibility you would have with traditional CD laddering.

Editor’s note: This segment originally aired in April 2011.

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