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Maximize Your Savings Potential with Certificate of Deposit (CD) Laddering

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May 31st, 2023

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If you’re interested in investing in certificates of deposit (CDs), you might be interested in CD laddering (CDs are also referred to as time deposit accounts). It's a straightforward process that can help you maximize the interest you earn on your savings while maintaining a level of flexibility for your funds that a single certificate of deposit can't offer.

What is a CD ladder?

A CD is a like a savings account—you put money in it that you plan to hold onto for a while. However, it differs from a savings account in that you put a specific amount of money in, and that money stays in the account for a certain period. The periods vary, but usually range from as low as six months up to as long as five years (note, some banks may offer longer or shorter terms). During the time your money is in the CD account, for the duration of the term, you earn interest at a fixed rate. When you cash out the CD, you receive the original amount plus the interest it accrued (as long as you hold the certificate of deposit through the length of the term you selected).

When you ladder a CD, instead of opening one certificate of deposit, you invest your money in multiple CDs with different maturity dates. This strategy allows you to take advantage of higher interest rates that may be offered by long-term CDs while also being able to access your funds at regular intervals due to short-term CDs.

How to create a CD ladder

A certificate of deposit ladder has different “rungs”; or maturity dates based on your selected CDs. You can create a CD with as many rungs as you want, but you usually want to choose CDs with different maturity dates. You can open the certificates of deposit all at once, or at different intervals if you think that rates might increase. The latter strategy has a risk, however: the interest rates on deposit accounts might go down so you could miss out on higher rates instead.

For example, imagine you want to create a three-year CD ladder with four rungs. You have $5,000 to invest and want to select accounts with different maturity dates and interest rates.

Your ladder might include the following:

  • $1,000 into a 6-month CD with a 2% annual percentage yield (APY)
  • $1,500 into a 1-year CD with 2.5% APY
  • $1,000 into a 2-year CD with 3% APY
  • $1,500 into a 3-year CD with 3.5% APY

The CD ladder above has four rungs or unique CDs. It's also a three-year CD ladder since the CD with the most extended term matures in three years. When you create a CD, you choose the CDs and determine the amount to deposit in each one.

As each CD account matures, you can reinvest it in another CD and create new rungs for your ladder, or you can cash out the CD and begin to dismantle your CD ladder. Depending on your needs, you can even do a mixture—cash out some CDs in the ladder and reinvest others.

The benefits of CD laddering

CD laddering can be a valuable part of your financial plan and offers some unique benefits.

  1. Flexibility with different maturity dates: Once a CD matures, you can choose whether to reinvest it in another CD or keep the cash. A CD ladder provides additional flexibility because the CDs mature on different dates. All your money earns interest in the savings account, but you don't have to wait years to access it.
  2. Fixed returns: CDs provide fixed returns on your money for the duration of the term. With a CD ladder, you can earn fixed interest on all of your balances at a predictable rate, as long as you keep the funds in the CD account for the entire term.
  3. Quicker access to funds: CD laddering allows you to have more flexible access to your funds, because you aren't putting all of your money in the same term. By mixing and matching different term lengths, you can make your money more accessible than you could with one just one certificate of deposit account.

The drawbacks of CD laddering

Even though CD laddering is a solid strategy, there might be better fits for some.

  • Potentially lower returns than other options: If you're open to investment options with higher risk, you might be able to earn a higher interest rate through other investments like stocks. However, unlike certificates of deposits the return is not guaranteed and you risk losing all of the money you invest—not just the potential gains.
  • Early withdrawal penalty: If you withdraw the money in your certificate of deposit before the maturity date, you might have to pay a penalty. Unless you feel confident that you won't need your money for the length of the terms you would choose, a CD ladder might not be the best option.
  • Minimum deposit amounts: Some CDs require a minimum deposit. If that's the case, you might be better off with a single CD instead of a ladder.

Is it the right strategy for you?

CD laddering is a solid option if you’re looking for a straightforward way to earn interest on your savings and don’t need immediate access to the funds. And, according to the U.S. Securities and Exchange Commission, CDs are one of the safest savings options so they’re an excellent option for most people. However, you should always do what's best for your personal financial situation.

Bottom line

Setting up a CD ladder requires intentionality, but once you've done it, you can enjoy the benefits for years. Plus, you have options and can switch strategies as each CD matures.

If you're ready to grow your money with a CD ladder, review your options and get started by opening an account online.

If you need additional guidance or want to discuss the next steps, you can also schedule a free appointment with one of our local bankers. You can meet in-person at your local branch or have a call over the phone.

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