What is a CD ladder?
If you're looking for an enhanced savings approach but you want to maintain periodic access to your funds, then Certificate of Deposit (CD) laddering may be a good option for you.
CD laddering is a financial planning approach in which an individual owns a variety of CDs with staggered maturity dates. Many people deposit equal amounts in each but, as we'll demonstrate, saving varying amounts has its advantages as well. Once the CD matures, you have access to your money to spend or, as many people do,to purchase another CD.
Why CD ladders are a good strategy
There are two primary benefits to laddering - it frees up portions of your savings at regular intervals and balances out interest rate volatility. This is accomplished by staggering your maturity dates in CDs of varying lengths, allowing you to adapt to changing interest rates.
Building a CD ladder
Once you've determined your deposit level and desired date of maturity, it's time to build the ladder. Let's walk through the process using the following example.
- You want to deposit $18,000. Instead of putting all of it into one CD, you open three different CDs, each with $6,000:
- 3-month CD
- 6-month CD
- 13-month CD
- As each matures, you take the money from that CD and rollover into a new CD. That means when you're finished, you will have three CDs, maturing at staggered dates – like climbing a ladder.
- If rates go up, you will have CDs maturing to take advantage of those new rates. If rates go down, you will still have some longer-term deposits locked in at higher rates.
See for yourself how different maturity dates affect savings with our CD Ladder Calculator.
CD laddering is also a popular savings choice because of its flexibility. Depending on your anticipated needs, you can deposit varying amounts in different CD terms, allowing for earning at a fixed rate but having access to your money as each term ends. Since most CDs have penalties for early withdrawals, if you need more frequent access to your money, then you may want to consider a money market account. In general, CDs are a worthwhile savings option due to their security with an FDIC-insured financial institution and the potentially higher fixed interest rates offered.
Ready to create your own CD ladder? Learn more about our CD options or stop by a local branch for more information.