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I’m guessing that the vast majority of your are familiar with the concept of a CD ladder, wherein you invest in a series of overlapping CDs with a certain maturity. For example, you might own 12 x 1 year CDs with one maturing every month, or 5 x 5 year CDs with one maturing every year.
The primary advantage of laddering your CDs is that it gives you access to the best CD rates while ensuring that at least a portion of your money will be available on a regular basis. But what if your goals are different? What if you’re saving up for an expense that you will incur all at once, at some point in the future?
Enter the reverse CD ladder, wherein you buy a series of CDs over time, each of which has a progressively shorter term. In this case, you’ll wind up with multiple CDs maturing at once – perfect for covering that one-time, future expense.
Let’s say that you’re saving for a house down payment, and that it will take you five years to save enough. With such a short timeframe, you really want to stick with safe investments, but you don’t want to earn paltry savings account interest rates.
In this case, you might take whatever you have saved up right now and buy a five year CD. Next year, after you’ve saved some more, plow your balance into a four year CD. And so on until you reach the target date in the future, when all of your CDs will mature simultaneously.
Alternatively, let’s say it will take you two and a half years to reach your goal. In this case, you can simply save up everything that you can for six months and then buy a two year CD. Six months later, buy an 18 month CD, and so on. Once again, when your target date arrives, your CDs will mature all at once, and you’ll be good to go.
While the interest rates will decline on each successive CD because you’re locking it in for less time, you’ll still earn more interest (on average) than you would be leaving your money in a regular old savings account. Of course, if you’re in a rising rate environment, it’s possible that this plan could backfire – i.e., savings rates could rise to the where they’re higher than CD rates.
If you’re interested in pursuing this strategy, you might consider finding a bank with minimal penalties for early withdrawal. That way, if rates rise dramatically, you can get out of your CD and re-lock at a higher. As I’ve noted in the past, I typically use Ally Bank for this sort of thing, as their rates are competitive and they have only a 60 day interest penalty for early withdrawal.