If You Want to Put Money Into CDs Before Rates Fall, This Is the Way to Do It

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If you've been paying attention to certificate of deposit (CD) rates, you may have noticed that they're pretty high these days. It's easy enough, for example, to find a 12-month CD paying 5%.

Today's CD rates aren't going to last forever, though. The Federal Reserve is expected to lower its benchmark interest rate pretty soon. Once that happens, borrowing rates are likely to fall, which is great news for consumers. That's because everything from auto loans to mortgages could get cheaper.

But CD rates are also likely to start dropping once the Fed begins making rate cuts. So you may want to get ahead of that by opening a CD sooner rather than later.

However, before you rush to open a CD in the hopes of scoring a great rate, it's important to be strategic to reduce your chances of facing an early withdrawal penalty. And one easy tactic could help you avoid that fee.

Don't risk losing money

The nice thing about CDs is that they guarantee you a certain interest rate on your money. With a savings account, your rate could fall without warning. Plus, because CDs require a commitment on your part, you're generally rewarded with a higher interest rate than what a savings account will pay you.

But if you break that commitment by taking an early CD withdrawal, you'll risk getting hit with a penalty, the exact amount of which will depend on your bank as well as your CD's term length. A good way to lower your risk of losing money to an early withdrawal penalty is to set up a CD ladder.

Here's how CD ladders work

Let's say you're looking to put $10,000 into a CD. Instead of opening just one CD, you can divide your $10,000 into five $2,000 CDs with varying terms. You might, for example, put $2,000 into a:

• 6-month CD

• 9-month CD

• 12-month CD

• 15-month CD (this term may not be available at every bank, but if you look around, you might find it)

• 18-month CD

Here's the benefit: After the initial six months, you get access to some of your money every three months. If an unexpected need for cash arises, like a surprise car repair, you may be less likely to get stuck paying an early withdrawal penalty because you can access a portion of your money as your various CDs mature.

An approach that might pay off well

Many people open CDs with the best of intentions, only to have an unexpected expense arise once their money is locked away in the bank. With a CD ladder, you can lower your risk of losing money to a penalty. So before you lock in a 12-month CD in anticipation of rates falling soon, consider the benefit of splitting your money up into a series of CDs instead.

And remember, you don't have to use the exact setup as outlined above. If you don't want to commit to a CD beyond 12 months, you could split your deposit into four and open a 3-month, 6-month, 9-month, and 12-month CD instead. The key is to split up your money for more flexibility.

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