CD ladders: How to boost your savings safely with a CD ladder strategy
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Updated: November 16, 2023
You're not alone if investing feels like a puzzle lately. Uncertain economic conditions and rising interest rates have fuelled complexity. This has led some investors to research low-risk strategies to park cash until markets provide more clarity. Many have turned to laddering certificates of deposit (CDs), but is the strategy right for you?
CD laddering involves parking money across various CDs of different term lengths. By staggering maturity dates, you’ll benefit from higher interest rates than a high-yield savings account, with a comparable redemption flexibility. CDs are a low-risk investment, as they're generally FDIC-insured and offer a predictable return.
This guide covers everything you need to know about CD ladders, including how to build one, the pros and cons, and where to find the best CDs.
What is a CD ladder?
A CD ladder is a savings strategy that involves investing your money across multiple certificates of deposit (CDs) with staggered maturity dates. This provides a higher interest rate than a high-yield savings account, with some of the redemption flexibility. The primary difference is that you’ll need to wait for CDs to reach their maturity date to avoid redemption fees.
As CDs mature on a rolling basis, you'll receive a portion of your investment back. While this is commonly reinvested into another ladder “rung,” you can opt for other assets or cash out. CD ladders are a valuable tool for conservative savers looking to earn more interest while maintaining flexibility.
What are CDs?
Unlike the old, dusty collection of compact discs sitting in your old CD tower at the back of the closet, certificates of deposit (CDs) are a type of bank account that lets you safely store cash at your favorite bank or credit union.
A CD is a time-bound savings account. The bank pays you a higher interest rate for putting your money away for a specific period of time. You generally get better interest rates when you put your funds away for a longer period of time. Like online savings accounts, online CDs generally offer better rates than CDs from a traditional brick-and-mortar bank.
CDs are less popular during a low-interest rate environment. That's because if interest rates go up, the CD rate is still locked in at the lower rate until it matures. You can usually break a CD to get your funds early in exchange for an interest penalty.
But CDs are gaining popularity in 2023, as interest rates are higher. Some banks are offering CD rates with an APY over 5%. Compare the best CD rates here.
How to build a CD ladder
The big picture idea is that you stagger maturity dates when initially investing. This means you'll receive proceeds back at the end of each CD's maturity date. For example, you can ladder three CDs by investing in a one-year, two-year, and three-year CD.
After a year, you'll receive the one-year investment back, with an additional 1-2 years for the next rungs. Upon receiving each portion, you can reinvest or use the cash to cover current expenses. Just note that early withdrawals are generally subject to penalties.
While maturity dates are commonly staggered by one year, you can ultimately decide the frequency. Likewise, you can choose how many overall rungs to invest in, the amount invested in each rung, and the types of CDs. However, here is a step-by-step guide to building a traditional CD ladder:
- 1 Decide your total investment and how many "rungs" your ladder will have. Most ladders have three to five rungs.
- 2 Divide your total investment across CD terms. For a five-rung ladder with $10,000, you can invest $2,000 in one-year, two-year, three-year, four-year, and five-year CDs.
- 3 Wait for each CD to mature and receive the proceeds on a rolling basis. You can reinvest into another ladder rung, asset class, or cash out.
- 4 (Optional) To maintain the ladder, roll the proceeds over into a new CD at the longest term of your ladder. If the original longest term was five years, you'd invest in another CD for that duration. This adds another rung, as your original five-year rung would now be four years away.
CD ladder example: How CD ladders work
This cd ladder example strategy lets you lock in a guaranteed interest rate across your investment horizon. Likewise, you’ll receive annual proceeds on a rolling basis, somewhat matching the flexibility of a high-yield savings account. Without reinvesting proceeds, you’ll walk away with $11,651.32 after five years.
However, some investors may decide to reinvest proceeds into more ladder rungs. While their interest rates depend on market conditions when reinvesting, they would follow this roadmap:
- End of year one: Receive $2,110.00, optionally reinvest into a five-year CD.
- End of year two: Receive $2,221.83, optionally reinvest into a five-year CD.
- End of year three: Receive $2,325.19, optionally reinvest into a five-year CD.
- End of year four: Receive $2,435.65 optionally reinvest into a five-year CD.
- End of year five: Receive $2,558.65, optionally reinvest into a five-year CD.
By reinvesting into five-year CDs, you add rungs to your ladder. However, it's up to the individual investor if they want to continue adding rungs to their CD ladder, cash out, or reinvest elsewhere.
As market interest rates adjust, investing in five-year CDs may no longer be attractive. However, continuing the ladder provides a stable and predictable source of returns that appeals to conservative investors. It’s up to the investor to decide whether CDs are worth it.
Pros and cons of CD ladders
A CD ladder makes a lot of sense for some savers but may not be ideal for others. Here are some pros and cons to consider when deciding if you should set up a CD ladder:
- Earn higher rates than savings accounts
- Regular access to funds
- Take advantage of rising interest rates
- Principal guaranteed by FDIC insurance
- Early withdrawal penalties
- Interest rates may lag inflation
- Miss out on potential stock market growth
- Must track multiple maturity dates
CD ladder Pros:
- Earn higher rates than savings accounts: CD ladders typically offer higher interest rates compared to traditional savings accounts, allowing you to grow your savings at a faster rate.
- Regular access to funds: With a CD ladder, you have the advantage of having access to a portion of your funds at regular intervals as shorter-term CDs mature. This flexibility allows you to meet unexpected financial needs.
- Take advantage of rising interest rates: By staggering the maturity dates, you’ll benefit if CD rates continue to rise. As each CD matures, you can reinvest your funds into new CDs with higher market interest rates.
- FDIC Insurance: The Federal Deposit Insurance Corporation (FDIC) provides insurance coverage for CDs, ensuring your investment is protected.
CD ladder cons:
- Early withdrawal penalties: If you need to withdraw funds from a CD before its maturity date, you may be subject to early withdrawal penalties. You can avoid these penalties by investing in no-penalty CDs.
- Interest rates may lag inflation: The purchasing power of your savings will decrease if inflation rates exceed the APY of your CD.
- Miss out on potential stock market growth: CD ladders are a conservative savings strategy and may not offer the potential long-term that can be found in the stock market. If you are willing to take on more risk, investing in stocks may provide higher returns over extended durations.
- Must track multiple maturity dates: With a CD ladder, you will have various CDs with different maturity dates. It is essential to keep track of these dates to ensure you can reinvest your funds or make any necessary adjustments to your savings strategy.
Is CD laddering worth it?
Yes, CD laddering is worth it. CD ladders offer a safe way to grow your savings compared to volatile investments like stocks. The strategy is worth it if you want to earn more than a high-yield savings account and avoid potential losses. It makes sense for conservative investors who wish to achieve stable returns with FDIC insurance. Likewise, it can be a good place to park cash while you await clarity in the market.
Where to find the best CDs and best CD ladders
Ally Bank
Ally Bank is an online bank offering generous interest rates. You can open a CD with no minimum deposit, and Ally doesn't charge monthly maintenance fees.
Their CD terms range from three months to five years, and their rates tend to be among the top yields available. Ally also offers an 11-month No Penalty CD with free early withdrawals in case you need access to your money. Overall, Ally Bank provides flexible, high-yield CDs with no hidden fees.
CIT Bank
CIT Bank offers a wide selection of CDs to meet different needs. Their standard term CDs range from six months to five years with a minimum $1,000 investment.
CIT is known for numerous jumbo CDs and its no-penalty 11-month CD. This caters to high-rollers and those who value redemption flexibility. Overall, CIT Bank is one of the top choices to find the best CDs.
With files from Eric Rosenberg
Daniel is an expert on travel, finance, and SEO. He received an Honours BBA (Finance) from Wilfrid Laurier University, then started his career with WOWA. Here, he learned various SEO tactics that were instrumental in quadrupling monthly traffic to one million views. Now the founder of Croton Content, Daniel helps financial companies scale through evergreen content. Aside from Money Wise, notable clients include Forbes Advisor, WealthRocket, and Hardbacon. Daniel loves to travel when not working. Although based out of Lisbon, Portugal, some of his most adventurous destinations include Rio, Cairo, and Istanbul.
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