Use a Reverse CD Ladder to Save for Future Expenses

Use a Reverse CD Ladder to Save for Future Expenses

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.

Source: Managing CD Rates on

10 Responses to “Use a Reverse CD Ladder to Save for Future Expenses”

  1. Anonymous

    Locking up your money in a CD definitely isn’t worth it unless if you buy into the highest 5 year or 10 year CD. If you look at their early withdrawal penalty, they are usually 9 months to 1 year of interest earned. If you stick your money into these accounts, after about 2 years you would have made more than you could have with the best 6 month or 1 year CDs

    Then when rates increase (if they ever do) you could take the money out of your 5 or 10 year CD and put it in a new shorter term CD. This way you will earn more on your money than you would with your savings account. You lose 9-12 months of interest but overall you earn more interest than you could have otherwise.

    Evan is right.. even investing a huge sum of money isn’t worth it to make $1k. Might be better to put your money in something else, real estate?

  2. Anonymous

    Very interesting. My only concern is where you would keep your money during the year while you save to buy the next CD. I guess with the paltry interest rates on savings accounts now, the point is moot.

    It would be perfect for someone that gets yearly bonuses, or uses their tax refund as a savings account.

  3. Anonymous

    I’ll have to check out Ally, but generally with CD rates so low – even if you double the rate it hardly seems worth it.

    INGs 1% vs Banky XYZ 2% – even at $100,000 you are talking about about 1K difference before taxes…doesn’t seem like enough money to lock up the cash

  4. Anonymous

    While the rates might be low now, they will not always be. This is a very interesting and \\\”out of the box\\\” way to prepare for future expenses.

  5. Anonymous

    Ginger- where are you getting such high rates on your savings and checking account? Its true that most ‘regular’ CD rates are extremely low that it doesn’t make much sense to tie up your money in them. There are some credit unions that offer much higher rates than the average.

    I’m just curious on whose your bank?

  6. Anonymous

    Nickel, I have to agree with Hannah. I have a high yield checking giving me 2.7% and a high yield savings giving me 1.1%. I would have to get a 5 year CD to beat the high yield checking and 12 month CD to beat the high yield saving. I do not think it is worth it.

  7. Nickel

    Hannah: Not true. While CD rates are much lower than they used to be, savings account rates are even lower. I wouldn’t bother with 12 month CDs at this point, but longer term CDs have better rates, esp. if you can break them for a minimal penalty. Like I said in the article, you can break CDs at Ally for a 60 day interest penalty. Might as well get 2.5%-3.0% instead of 1% in that case.

  8. Anonymous

    I actually looked into this 2-3 years back when I was saving up for a car downpayment and a trip to Europe. Turns out, with the CD rates so low, it makes very little sense to reverse-ladder CDs. Moreover, most CDs have a decently sized minimum deposit amount – something you might not have on hand. The best solution I found: Use SmartyPig.

    > Better APY than CDs (Used to be much higher, sadly).
    > No / Low minimum deposits.
    > Automated deposits.
    > Less liquid than a Savings account.
    > More liquid than a CD.
    > Cash Back rewards if you cash it out as a gift card.

    Also, it is a great way to curb impulse spending. One time, I had a hankering to buy an internet tablet. Even though I could afford to pay $400 out of pocket, I decided to explicitly save up for it instead before buying it. So I set up a goal for it, and funded it so it would reach the goal in 5 months. Turns out, when I got to that point, the hankering had passed, and I had ~$450 that I just rolled into my emergency fund.

  9. Anonymous

    If you had written this a few years ago it might be more relevant, but the CD rates I have seen lately are so meager that keeping your cash in a savings account is just as good of an option, plus then it’s more liquid in the case of an emergency.

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