The Ultimate Guide to CD Laddering

A certificate of deposit (CD) is a savings instrument that ensures growth through a guaranteed rate of return. Typically, these accounts have a higher annual percentage yield (APYs) than other options. The funds deposited in CDs remain locked throughout the CD’s term. One way of maximizing the benefits of these accounts is through CD laddering —or investing in multiple CDs with staggering maturities — which creates higher APYs on long-term CDs and ensures consistent returns through short-ter m CDs.

CD laddering could potentially help you grow your money as you navigate the current economic climate. However, proper management is a must. It’s essential to understand your CD laddering options, how CD laddering works and what steps you need to take to build an effective CD ladder.

CD laddering refers to a saving and investment strategy where a lump sum of money is divided into multiple certificate of deposits (CDs) with different maturity dates. This allows the investor to maximize higher growth rates available to CDs with longer terms while having access to a portion of the funds. You can take out the money from CDs with shorter maturities while the others still earn.

The guaranteed rate of return is one of the advantages that make CD laddering an attractive savings option. But remember that you may not be able to access your finds for a certain period.

Generally, CD laddering is a safe investment. Depending on where you purchase accounts, your funds may be insured up to $250,000 by the FDIC or the NCUA.

CD laddering may also be a good investment option for people who prefer risk-off environments. Each CD also has a fixed APY, which means there’s a guaranteed return throughout its term.

By dividing your funds into different CDs, you can earn better returns while having access to a portion of your money every time a CD reaches maturity. This may provide additional financial security, especially in an economic situation heading into a recession.

Use the following to get an idea of how much more can be earned from CD laddering.

Today: 1/27/2023 Investment amount: $10,000 Rate: 1.25%

Today: 1/27/2023 Investment amount: $10,000 Rate: 1.25% - 2.25%

Building a CD ladder can lead to higher total earnings, especially since CDs with longer terms tend to have higher APYs.

For instance, investing $10,000 in a CD account with a one-year term and reinvesting the total after maturity to another one-year term repeatedly for 10 years can increase your money by $1,322.71. A similar amount invested in different CDs with staggering maturity dates can lead to $1,514.35 in total earnings in the same period.

Note that the examples use simple interest instead of compound interest, which further grows your balance.

Building a CD ladder could be a lucrative option for people who want to secure their money in deposit savings accounts while earning interest. However, there are certain factors you should consider.

Determine whether CD laddering fits your financial situation and goals. Comparing CD laddering to other saving and investment options may also be best.

Building a CD ladder can take some research, especially for first-timers. Knowing what steps to take can help you navigate the process and prevent mistakes.

Below is a step-by-step guide with examples to give you a better idea of what to do.

Step 1:

Determine the right term and amount

The right amount and term may vary per person because of differences in needs and situations. You first need to determine how much to invest and the length of term for your term length. There’s no rule regarding the amount you should invest in a CD ladder. Some institutions may have a minimum deposit requirement, so reviewing this information is a good idea.

Step 2:

Open and separate the initial CDs

When you know how much to put into your CD ladder, you need to determine how to divide the funds. Decide how many CDs you want to manage and the terms for each. The most common option is to divide the investment evenly into five CDs. Allocating different amounts to the accounts is also an option. You can also open your CDs from various institutions.

Step 3:

Reinvest

Once the first CD reaches its maturity date, the principal plus all interests earned can be cashed out. You may also opt to continue your CD ladder by reinvesting the money into a new CD and repeating the process every time a CD matures.

Step 4:

Review your CDs

You can choose what to do after each CD matures. Although reinvesting further grows your money, reviewing your financial situation after every maturity date is important. You may use the money to cover other expenses depending on your needs.

You should also check current APYs. If the rates are too low, you may consider breaking up your ladder and finding a different option that offers higher rates.

One of the things that make CD laddering appealing is the flexibility it offers. There’s no single way to go about it. The best method is the one that can help financially prepare you to face the current economic climate.

Here are some examples of common investor profiles and the type of CD laddering strategy best suited for each profile:

If you have decent savings you want to grow but need frequent access to your money due to short-term financial goals, you can opt for shorter lengths like one-year CDs. You can use our CD calculator to see how your deposit grows over time.

For example, a parent wants to keep their child’s annual tuition fee, insurance payment and mortgage in a secure place. They can set up their CD ladder in a way that allows them to access portions of their cash when they need it.

Mini CD ladders have short-term CDs. For instance, three-, six- and nine-month terms. Although these tend to have lower interest rates, they can still help you grow your money.

If you have a large amount of cash sitting in a non-earning account, you may want to consider CD laddering. You may opt for CDs with longer terms if you don’t need immediate access to your money.

Long-term CD ladders offer more earnings to investors. That’s because CDs with longer terms usually have higher interest rates.

Having different savings goals may require a different strategy. For example, if you need access to a more significant portion of your money, you can opt to put more in shorter terms. But if you aim to accumulate more, you can put more in longer terms with better APYs.

The table below shows how uneven splits work. Calculations are based on compounding interest.

There are various reasons that make CD laddering a great saving and investment strategy. For instance, it tends to lead to higher returns than traditional savings accounts.

There are also potential drawbacks to watch out for. Unlike high-yield savings accounts, you can’t access the funds you deposit in CDs anytime you want. You have to wait for the maturity date. Otherwise, you’d have to pay an early withdrawal fee.

If you think CD laddering is right for you, the next thing you need to do is ensure that you can maximize the benefits it offers. Compare offers from various institutions. If you want a safer option, purchasing CDs from federally insured banks and credit unions may be better. On the other hand, some brokerage firms may offer higher rates but come with higher risks.

If you find it difficult to build a CD ladder or are looking for professional guidance, hiring a financial advisor may be best for you. They can help you manage your finances to improve your financial situation. They can also provide advice for attaining financial goals. Additionally, they have the industry knowledge necessary when making investment decisions.

Finding the right resources can help you make well-informed decisions. MoneyGeek compiled a list of resources and tools you may find helpful as you navigate CD laddering and investment.

• ChooseFIFoundation: Sign up for this free training course and become more financially literate. Learn about financial independence and how to achieve it.
• FDIC BankFind Suite: Find out what federally insured banks offer their services in your area by selecting your city, state or territory, and zip code in the FDIC’s BankFind Suite.
• FINRA: Access guides on personal finance and investing. Find investor tools you can use for free.
• HelpWithMyBank.gov: Learn more about CDs FAQs from the Office of the Comptroller of the Currency.
• Investor.gov: Learn more about CDs.
• Investor.gov: Whether you’re a newbie investor or have been investing for a long time, reviewing the basics is a must. Use the SEC’s introduction to investing guide to learn more about investment products and markets.
• National Association of Personal Financial Advisors: Locate a fee-only advisor near you through the (NAPFA) finder.
• NCUA Credit Union Tool: Find out if a credit union is federally insured by the National Credit Union Administration.
• Nav.it: Start a habit of saving and monitoring your finances using this tool.
• U.S. Securities and Exchange Commission: Learn more about investing with the help of this beginner’s guide from the SEC.
• Women’s Institute for a Secure Retirement: Find guidance and tips you can use as you start your saving and investment journey.