CDs won't be paying 5% for much longer, but a financial planner shares a strategy you can start today that will pay off for months

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• CD rates are dropping in anticipation of the Fed potentially cutting its rates soon.
• This means that CD rates of 5% APY will likely decline and get less competitive.
• CD ladders can help you earn a great rate for longer, no matter what happens to CD rates.

The best CD rates for short-term CDs are currently around 5% annual percentage yield, but that might not stay true for long.

The Federal Reserve, which is the central banking system of the U.S., is expected to lower its rates as soon as September, which will result in lower interest rates across the board. Since CD rates are fixed, they are already dropping in preparation for those predicted Fed cuts. But CD ladders can help you keep earning great rates, long after the Fed cuts rates.

CD ladders offer flexibility while still locking in high rates

CDs are a type of savings account. You put money in them for a pre-determined length of time in exchange for a fixed interest rate until the term length is over. This is great for locking in strong interest rates, but it comes at the cost of liquidity; you won't be able to take money out before the CD's term is up without paying early withdrawal penalties.

A CD ladder can have multiple benefits for individuals planning their savings goals. "It offers flexibility, and, at the same time, they're locking in favorable rates," says Uziel Gomez, CFP®, AFC, founder and financial planner for Primeros Financial.

Opening a CD ladder means you'll be able to lock in a good rate on several different term lengths— past when rates would have lowered — without locking away all of your savings for the ladder's full length. You're also free to choose whatever CDs still offer 5% interest, no matter who's offering them.

When making a CD ladder strategy, Gomez says to consider your savings goals for the next five years to see what could benefit from opening a CD. "If a client is looking to renovate a home, and they want to do it a year out, then they might want to ladder that entire amount into a six-month term, and then a one-year term, just because you never know what happens a year out," Gomez adds. This gives you a bit of extra room in case things happen a little sooner than you expect.

Building a CD ladder with terms paying 5% or more

Right now, short-term CDs offer better rates than long-term CDs, so our example CD ladder is shorter-term. We'll choose CDs from banks only, since joining a credit union has some extra steps, and we'll stick to CDs offering at least 5% APY.

CD Name	CD Term Length	CD Annual Percentage Yield
EagleBank 6 Month CD	6 months	5.20%
EagleBank 9 Month CD	9 months	5.30%
EagleBank 12 Month CD	1 year	5.22%

If you have $30,000 and you want to buy a house within 1 year, you could put $10,000 in each CD. Your 6-month CD will be the first to mature; when it does, you'll get your first $10,000 back with an additional $250 of interest. When your 9-month CD matures, you'll get another $10,000 back, plus around $400 of interest for a total of about $650 of interest.

When your final 1-year CD matures, you'll have all of your principal back, along with about $500 of interest from just the 1-year CD — reaching around $1,150 of interest total. You'll also have kept a 5% interest rate on your funds long past when rates are predicted to drop.

CD ladders aren't suited to every purpose

While CD ladders can be a good strategy for locking in high interest rates while maintaining liquidity, they aren't suited to every purpose.

"Everyone needs an emergency fund, so I wouldn't recommend putting all of your savings in a CD because people are going to need that liquid flexibility," says Gomez.

For emergency funds, high-yield savings accounts are a better fit because you can pull money from them at any time. And investing might be a better fit for long-term savings goals that can withstand market fluctuations.

Editor's note: This article was originally published on August 23, 2024. The CD ladder example has been updated due to CD rate changes.