Maximize your Growth Potential with CD Laddering

Let’s say you’re considering investing funds in a certificate of deposit (CD)—sometimes called a time deposit account—which offers a fixed 3.5% annual percentage rate (APR) for a term length of three months. However, you see there’s another CD option that offers the same or higher APR that requires a term length of two years to fully mature. Both certificate of deposit options are safe, reliable ways to grow your investment. While you may be interested in the CD with the higher rate of return, you may also be concerned about losing access to your money for such a long period of time, particularly given the unknowns of the market.

Fortunately, there’s a way to maximize the interest you earn from CDs while still maintaining flexibility in accessing your funds through a financial approach called ‘CD laddering.’ Continue reading for an overview of how CD ladders work, how to create a CD ladder, and the advantages and disadvantages.

What is a CD ladder?

A CD ladder is a savings strategy that involves opening multiple CDs at different term lengths. You may open all of the CDs at one time, or plan to open them at different times to take advantage of changing rates. The strategy gives you an assortment of interest rates (both due to timing as well as the terms you agree to) and staggered maturity dates, which helps mitigate risk if you need access to funds. As each CD matures, you can choose to renew, and continue the ladder, or withdraw the funds for other purposes.

Instead of investing all your funds into a single CD that may not offer either your preferred ideal interest rate or duration of time, CD laddering involves investing your money in several CDs with different timelines which can bring you closer to your goals and align more strongly to your needs. This approach allows you to enjoy the benefits of higher interest rates that may be offered by longer-term CDs, while also being able to predictably access your funds at regular intervals through short-term CDs.

How to build a CD ladder

Creating a CD ladder involves opening multiple CDs with varying maturity dates. For example, if you had $250,000 to initially invest and want to build a two-year CD ladder, you might spread out your funds, with each CD as another "rung" on the ladder.

$50,000 in a 3-month CD with a 3.0% annual percentage yield (APY)
$50,000 in a 6-month CD with a 3.30% APY
$50,000 in a 1-year CD with a 3.75% APY
$100,000 in a 2-year CD with a 4.15% APY

As each CD matures, you can cash it out (and recoup the earned interest) or you can renew the CD, ideally into a longer term CD as the remaining lengths for your other CDs shorten. This way, your money will all eventually have been in longer-term CDs with higher APYs, though you will always have CDs maturing regularly for flexible access to your funds.

Pros and Cons of CD ladders

CD ladders have their benefits and their drawbacks. Here are some factors to consider when deciding whether laddering CDs is right for you.

Pros

Access to cash. As individual CDs in your CD ladder mature, these funds become available at regular intervals, whereas one CD does not provide that level of flexibility, as many CDs have early withdrawal penalties if money is taken out or a CD is closed before the maturity date. By having multiple CDs in a ladder, funds are available sooner, if you need it.
Better interest rates. If interest rates rise on CDs, you have the opportunity to reinvest funds from your CDs that have matured. However, if all your money is tied up in a single long-term CD, you won’t be able to invest in a new CD because your funds will be locked away.
Having a CD ladder lets you decide how you want to divide your investments. Once a CD matures, you can choose whether to reinvest it in another CD or keep the funds. A CD ladder also provides additional flexibility because CDs mature on different dates.
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.

Cons

Keeping track. Having a CD ladder means keeping a careful eye on when CDs mature. There is a relatively short window of time (generally one or two weeks) when a CD matures to withdraw your funds. Otherwise, banks may renew your CDs in the same short term window automatically. If you’re a member of The Private Bank, you may work with your relationship manager to help manage these dates and your preferences for next steps.
No guarantee that rates will rise.A CD ladder can offer multiple opportunities to lock in higher CD rates. However, interest rates fluctuate depending on the economy, which means laddering CDs does not guarantee higher interest rates for longer-term CDs when your shorter-term CDs mature.
Your funds are still unavailable for a time.Although having multiple CDs in a ladder allows you to access funds more regularly than waiting for a single long-term CD to mature, you still have to wait for your earliest CD’s maturation date to withdraw your funds. Typically, withdrawing funds early can incur several months’ interest worth of penalties.