Savings How a CD Laddering Strategy Can Elevate Your Savings

by Karen Gibbs | October 10, 2019

Looking for a way to make your hard-earned money work harder for you? Consider certificates of deposit — aka CDs.

That's because CDs tend to offer more attractive interest rates than savings options like money market accounts. But to tap the typically higher yields of CD accounts, you often have to sacrifice access to the funds held in them.

This is because it's only during brief windows of time after the account matures that you can withdraw money without penalty (term lengths vary and may be as little as a few months to several years).

With this trade-off in mind, savvy savers leverage a different strategy — one that offers a more rewarding, but still secure, way to grow money: CD laddering.

What is CD laddering?

CDs are a type of savings account that pays interest and reserves money for a certain length of time — the longer the term, the higher the interest. CD laddering is a savings strategy that invests in multiple CDs for varying lengths of time. Over time, all CDs will earn the higher interest rate, yet one CD will become available each year if cash is needed.

“Staggering CD maturation dates gives access to some money sooner while also benefiting from better interest rates earned on medium- and long-term CD options,” explains financial expert Andrea Woroch.

How do I ladder CDs?

Prevailing interest rates can fluctuate up and down. One of the key features of a CD is the certainty of a locked-in interest rate for an extended period of time (i.e., the term length of the account). Looking at available interest rates can help you identify when to open a CD account, and for how long of a term.

In conditions where increasingly longer-term CDs offer incrementally higher interest, you might consider funding one-, two-, three-, four- and five-year CDs. “As each CD comes due, roll it over into a five-year CD” to achieve that “laddered” structure to your savings, says Jeremy Smith, a financial adviser and the founder of Harbor Wealth Management. “Eventually, you’ll be earning five-year interest on all the CDs, with one CD maturing each year.”

Hypothetical scenario. For illustrative purposes only. Infographic demonstrating how CD laddering works. There are 4 steps. Step 1: Choose a lump sum of savings, depicted here with stacks of coins. Step 2: Divide those savings into portions, shown here as 4 stacks of coins. Step 3: Fund multiple CDs with staggered maturities. Step 4: At maturity, move funds into longer, high-earning CDs. Steps 3 and 4 are shown as a horizontal bar graph with colors showing the potential length of each CD.

Consider this hypothetical scenario: a saver has $2,500 to deposit into CDs. To have access to all of that money each year, the saver could invest it all in a one-year CD earning, say, 1.35% Annual Percentage Yield and roll it over each year. After five years, those funds would grow to $2,673.37 with interest compounded annually and assuming a consistent rate over the time period.

On the other hand, suppose the saver laddered CDs, depositing $500 apiece in one-, two-, three-, four- and five-year CDs, earning hypothetical APY rates of 1.35%, 1.85%, 2.25%, 2.25% and 2.5%, respectively. When each CD matured, the saver could roll the funds over into a five-year CD. This would allow access to some of the money each year and take advantage of the higher yields typical of longer-term CDs.

By the time all CDs were rolled over into five-year CDs, the total amount would be worth $2,805.39. That’s $132.02 more than investing and reinvesting a one-year CD over five years. Using a CD laddering calculator can help you map out your plan.

Is CD laddering right for you?

While CD laddering can be a smart, safe way to grow savings, you'll want to make sure it's the right savings strategy for you. Before laddering CDs, consider if the following applies to you.

You have emergency funds in a savings account

While CD laddering can be a powerful savings strategy long-term, consider leveraging it as a supplement to a traditional savings account, which likely offers more liquidity.

“Everyone needs to have enough cash on hand to handle at least a $500 unexpected expense,” suggests Beth Logan, a tax advisor at Kozlog Enterprises. “I use $500 as a starting point, but it depends on your lifestyle. If you have aging pets or an old car or if you’re paid in part or in full on commission, you may want to have more in your emergency fund.”

You prefer less risk

CDs keep money secure while typically earning more interest than a checking or savings account. And if the account was opened with an institution that’s backed by the FDIC or the National Credit Union Association, the CD and its funds are insured up to $250,000 per depositor, for each account ownership category.

You've planned ahead so funds will be available for projected expenses

Is there a big expense in your future, such as a wedding, college or business expansion? Think ahead and ladder CDs so they mature at intervals that will accommodate your financial needs.

Tips for laddering CDs

When buying CDs, there's so much to consider — rates, penalties, brokerages, renewals. The following tips will help you navigate those choices.

Shop around

CDs are available through national banks, community banks, credit unions, brokerage firms and financial advisers, but rates may vary a lot among them. Logan recommends checking rates locally and online before you buy. Once you become familiar with banks or credit unions that consistently offer good rates on CDs, she suggests you comparison shop within this group.

Get help

A brokerage can look for CD rates nationwide and offer other perks, as well. “With a brokerage firm, you can potentially ask for bids to sell your CD should you need cash before the CD matures,” says Nicolas Straut, an avid user of CDs. You may be able to avoid heavy penalties for early withdrawal, but there's no guarantee that your CD won't sell for less than it is worth.

Finally, make sure the CDs are opened with an insured institution so your investment is secure.

Consider penalty vs. no-penalty CDs

Most institutions charge a hefty penalty for withdrawing CDs early, thus reinforcing that you keep that money in your savings. However, there are some no-penalty CDs that pay lower interest but do not charge for early withdrawal. These can be especially helpful if you need money or if rates go up and you want to invest in a higher paying CD.

Stay on top of rates and maturity dates

Create calendar alerts for CD maturity dates so you can reinvest efficiently. Be flexible — if a six-month CD matures but pays a lower rate than it did previously, invest in a one-month CD until rates improve. Indeed, it pays to check rates regularly. You may even find that within the same bank, savings accounts sometimes pay higher interest than do shorter-term CDs such as three- and six-month CDs.

Create calendar alerts for CD maturity dates so you can reinvest efficiently.
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Now that you know about laddering CDs, it’s time to start climbing toward greater financial security.

Karen Gibbs

is a New Orleans-based freelance journalist who specializes in lifestyle and finance articles both online and in print.