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Middle Tennesseans looking to capitalize on today’s rising interest rates and protect their hard-earned savings should take a close look at a tried-and-true investment: the certificates of deposit (CDs) ladder strategy.

For the first time in years, CDs make impeccable financial sense. Over the past few years, interest rates on CDs have risen to a point where savers can earn a respectable return. At Ascend, a one-year CD yields about 4.39%. One year ago, that rate was 0.50% at Ascend, and much lower at other financial institutions.

Why have CD rates increased? The main reason is that these rates are closely tied to the federal funds rate, which is one of the more important tools the Federal Reserve uses in its fight against inflation. When inflation is up as it is now, the Fed raises the fed funds rate to cool a hot economy – and a byproduct of is are higher CD rates.

Today, the fed funds rate hovers around 4.58%, which is a level not seen in more than 15 years. This represents a unique opportunity for Middle Tennesseans to lock in compelling rates before the Federal Reserve begins lowering the fed funds rate, as is expected later this year or in 2024, as inflation starts to cool.

What is a certificate of deposit and how does a CD ladder work?

A CD is a special type of savings account with a fixed interest rate for a predetermined period of time (usually three-month increments for up to one year, and then for intervals of one, two, three and five years). Your money is safe because the funds are insured (up to $250,000) against losses by the National Credit Union Administration or the Federal Deposit Insurance Corp.

CDs are also appealing because they:

●    Provide a safe haven to invest your money as opposed to the stock market, where the S&P 500 (the common benchmark for the U.S. stock market), declined 19% last year.

●    Deliver predictable returns because the interest rate is locked in at purchase

●    Offer investors a higher interest rate than savings and checking accounts

The downside, however, is that nearly all CDs have a penalty for early withdrawal of funds.

A CD ladder is pretty straightforward. It is a savings strategy where you purchase CDs with staggered (or laddered) maturity dates. The longer the time period, the higher the interest rate. When the time period ends, the funds can be withdrawn and transferred to another account or reinvested into a new CD – or spent. Here’s an example: 

CD Term    Interest Rate                     Deposit Balance at Maturity

1 Year          4.39%                                 $5,000                 $5,219 

2 Years       3.45%                                 $5,000                 $5,350

3 Years        3.30%                                 $5,000                 $5,511

4 Years       3.35%                                  $5,000                 $5,704 

5 Years        3.40%                                 $5,000                 $5,909

Remember again, the interest you earn is risk free, and if you do not need the funds when the CD matures, you can roll it over into a new one.

Key considerations when setting up a CD ladder

Investing in CDs and setting up a CD ladder can be a smart move for Middle Tennesseans who do not foresee needing the money in the near- to medium-term. Here are two important factors to consider when constructing a CD ladder:

1. Determine your goals. Make sure you have a clear reason why you are investing in a CD. You may have multiple reasons, such as the birth or adoption of a new child, buying a car or making a down payment on a home. Maybe it is something as simple as the desire to earn more on your savings. Being honest about anticipated life events or purchases will help determine how much money you need to invest in each CD so you can achieve your savings goals.

2. Know when you will need the money. Timing is crucial when structuring CD ladders because it has a direct bearing on the maturities of each CD. For example, if you want to purchase a home in five years, then there is no need for a ladder – put the entire amount in a 60-month CD. Or maybe you need to pay for your child’s college tuition next year, in which case you can create a ladder with maturities that correspond to when payment is due. The important point is that you want the maturities to align with the timing of anticipated life events so you can maximize the interest on your money.

The bottom line

Most industry experts believe interest rates will move slightly higher this year as the Federal Reserve continues its battle to bring down inflation. And in today’s rising interest rate environment, CDs and CD ladders represent an appealing way to protect your hard-earned money and maximize interest income to help meet your financial goals.