Now might be a good time to start thinking about a CD or bond ladder for your short-term or “safe money”. With the FOMC still raising short-term rates, long term rates have had plenty of time to move up as much as possible…

Why ladder? Let’s look at three scenarios:

  1. Rates keep going up
    If rates go up, you have CDs maturing every year that you can then turn around and lock in at a higher rate. In the mean-time, hopefully you’re beating your money market rate by investing in the higher CD rate.
  2. Rates stay the same
    You’re earning more in a CD than in your money market account.
  3. Rates go down
    You’ve locked in that juice 5.5% rate for a 5 year period while your money market yield starts going down as rates fall. Pretty soon your money market is yielding 3% again, but you have a full 200 basis points more in earnings because you decided to ladder. Ideally the yield curve gets back to a normal curve, and you still get decent rates when you roll forward into the new 5 year CD each year.

Oddly enough, with the current rates available on CDs, you’re losing very little yield on the shorter-term CDs if you’re just starting out on a ladder.