CD Ladders and Money Market Funds: Safe Places to Park Your Cash

Certificates of Deposit (CDs): Lock In Rates for a Fixed Term

A CD is a time deposit with a bank or credit union. You agree to leave your money locked up for a fixed period (ranging from 3 months to 5 years) in exchange for a guaranteed interest rate. CDs are FDIC insured up to $250,000 per depositor, per institution, making them one of the safest places to hold cash.

Current CD rates (as of 2024-2025) range from approximately 4.5-5.5% for 1-year CDs and 4-5% for 5-year CDs, though these fluctuate with the Federal Reserve's interest rate decisions. The trade-off is straightforward: longer terms typically offer higher rates but lock your money up for longer. Early withdrawal penalties usually cost 3-6 months of interest for short-term CDs and 12-18 months for long-term CDs.

Special CD types worth knowing: Bump-up CDs let you request a rate increase if the bank raises rates on new CDs. No-penalty CDs allow early withdrawal with a small penalty (typically 60-90 days of interest), offering more flexibility than standard CDs. Both typically offer slightly lower rates than standard CDs in exchange for these features.

The CD Ladder Strategy: Balance Yield and Liquidity

A CD ladder is a strategy that splits your money across CDs with different maturity dates, giving you regular access to some of your cash while earning higher rates on longer-term CDs.

Here is how to build a 5-year CD ladder with $25,000: Put $5,000 into each of five CDs with maturities of 1, 2, 3, 4, and 5 years. After one year, the first CD matures — you have access to that $5,000 plus interest. You then reinvest that money into a new 5-year CD, maintaining the ladder. Each year, one CD matures, giving you access to cash while the rest continues earning higher long-term rates. Your average yield is roughly the average of the five rates, which typically beats short-term CD rates while keeping 20% of your money accessible each year.

The ladder strategy works especially well in a falling rate environment: your longer-term CDs continue earning higher rates even as new CDs offer lower yields. In a rising rate environment, shorter maturities let you reinvest at higher rates sooner. Learn how bond ladders work similarly →

Money Market Funds: High Yield with Check-Writing Access

Money market funds are mutual funds that invest in short-term, high-quality debt instruments like Treasury bills, agency debt, and commercial paper. They aim to maintain a stable $1.00 net asset value (NAV) and offer yields that closely track the Federal Reserve's interest rate. Current yields range from 4.5% to 5.2%.

Unlike CDs, money market funds are not FDIC insured, though they are historically extremely safe. Only two money market funds have ever "broken the buck" (fallen below $1.00 NAV), both during the 2008 financial crisis, and both were funds heavily exposed to Lehman Brothers debt. Treasury-only money market funds are considered the safest because they hold only US government debt with zero credit risk.

There are three main types: Treasury-only funds (safest, interest is state and local tax exempt), government funds (include agency debt, slightly higher yield), and prime funds (include corporate debt, highest yield but slight credit risk). Most money market funds offer check-writing privileges (typically $250 minimum per check) and same-day redemption, making them ideal for cash you might need on short notice.

Treasury Bills: Short-Term Government Debt

Treasury bills (T-bills) are short-term debt securities issued by the US government with maturities of 4, 8, 13, 26, and 52 weeks. They are backed by the full faith and credit of the US government, making them effectively risk-free. T-bills are sold at a discount to face value and mature at par — the difference is your interest. Current yields are around 5.0-5.3%.

T-bills have two major advantages: they are exempt from state and local income taxes, which matters if you live in a high-tax state like California or New York, and they are highly liquid — you can sell them on the secondary market at any time through a brokerage. You can buy T-bills directly through TreasuryDirect.gov or through any major brokerage (Vanguard, Fidelity, Schwab) on the secondary market with no commission.

For most investors, a combination strategy works best: use a money market fund for the portion of cash you might need within days, build a CD ladder for the portion you can lock up for 1-5 years, and supplement with T-bills if you want state tax exemption on the shortest-term portion. Complete guide to Treasury securities →

Which is safer: CD or money market fund?

CDs are technically safer because they are FDIC insured up to $250,000 per depositor per institution. Even if the bank fails, the US government guarantees your money. Money market funds are not FDIC insured but are extremely safe — backed by high-quality short-term debt and regulated by the SEC. Treasury-only money market funds are considered as safe as CDs because they hold only US government debt. In practice, both are among the safest places to hold cash.

Are money market funds FDIC insured?

No, money market funds are not FDIC insured. They are securities (mutual funds), not bank deposits. However, they are regulated by the SEC under Rule 2a-7, which requires them to invest in high-quality, short-term debt and maintain a stable $1.00 NAV. Treasury-only money market funds are considered virtually risk-free because they invest exclusively in US government obligations. If FDIC insurance is essential for your peace of mind, choose a high-yield savings account or CD instead.

How do I build a CD ladder?

Divide your total cash by the number of years in your ladder. For a 5-year ladder with $25,000, put $5,000 into a 1-year CD, $5,000 into a 2-year CD, $5,000 into a 3-year CD, $5,000 into a 4-year CD, and $5,000 into a 5-year CD. When the 1-year CD matures, reinvest it into a new 5-year CD. Repeat each year. You will always have one CD maturing within 12 months while the rest earn higher long-term rates. Most online banks (Ally, Marcus, Discover) make it easy to set up CD ladders.

What happens if I withdraw from a CD early?

You pay an early withdrawal penalty, typically 3-6 months of interest for CDs under 12 months and 12-18 months of interest for longer-term CDs. Some banks may also forfeit all interest earned and charge a small principal penalty. Always read the terms before opening a CD. If you think you might need the money before maturity, choose a no-penalty CD (allows withdrawal with 60-90 days interest penalty) or a shorter term. Alternatively, use the CD ladder strategy so only a portion of your cash is tied up at any given time. Compare HYSA vs CDs →

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