A CD ladder is a great option to consider when it comes to making the most out of your savings. A CD ladder is a savings strategy where you deposit money in multiple certificates of deposit (CDs) with staggered maturity dates. CD ladders optimize your savings by allowing you to earn interest at potentially higher rates, while maintaining some liquidity. Once a CD in your ladder matures, you can choose to deposit the money into a new CD or withdraw it.
How does a CD ladder work?
To build a CD ladder, you’ll first need to decide how much you want to put into it and for how long. Then you’ll divide that amount up into multiple CDs with staggered maturity dates. The staggered laddering of the CDs is the key in this savings strategy to ensure balanced returns and access to funds. When a CD in your ladder matures, you can either deposit the money into a new CD or withdraw it.
Here’s an example to help you better understand the CD ladder savings strategy. Let’s say you have $30,000 that you want to put into the CD ladder. Picture a ladder, and each step of the ladder starting from the bottom represents a different CD. Each step (or CD) has a different interest rate and maturity date. You can take your $30,000 and put $10,000 into each step. The first step will mature in one year, the second step matures in two years, and the third step in three years.
Once the first step’s money matures after one year, you have the choice to either withdraw all or some of the funds (with the interest you made on it!) and use it for something like a vacation or home repairs. Most CDs have a grace period after the term ends that lasts a few days. If you don’t do anything, the CD will automatically roll over with the same term but with a different interest rate, which can be higher or lower than the original interest rate. You can also use this time to deposit the money in a new CD on your ladder above the third step. This strategy allows you to continuously renew your savings strategy further out into the future while still being able to access your money at each term date.
Benefits of building a CD ladder
There are several advantages to depositing your savings into a CD ladder:
- Regular access to funds (maturing CDs): A key advantage to CD ladders is that you will be able to access your funds as each CD in the ladder matures. At each maturity date, you have the option to either withdraw your earnings or deposit back into extending your CD ladder. (Remember, you must withdraw funds during the grace period, otherwise the CD may automatically renew for the same term, but reflecting current interest rates.) Or you can do a mix of both.
- Higher interest rates with longer-term CDs: CDs with longer maturity dates usually have higher interest rates than CDs with shorter maturity dates, but not everyone is in a position to deposit money in longer-term CDs. With staggering term lengths, you can still save with those longer-term CDs while maintaining access to some of your money and save with shorter-term CDs.
- Flexibility to reinvest or withdraw based on financial needs: CD ladders give you the choice to either deposit back the money once a step of the ladder matures or withdraw it. This is great in case unexpected expenses come up, or if you want to treat yourself to a new car or vacation. A CD ladder will give you flexibility to use your savings while growing them at the same time.
- Risk mitigation during fluctuating interest rates: CDs lock in the interest rates once you set them up. This allows you stronger risk mitigation during times of economic turmoil.
Downsides to CD Ladders
CD ladders may not be the best option depending on your lifestyle. Here are some potential downsides of a CD ladder to provide an overview of this strategy:
- Keeping track of multiple maturity dates: Since CD ladders require you to keep track of multiple CDs, you will need to be on top of different maturity dates so you can decide to either withdraw or renew the CD.
- Rates may not always outpace inflation: There is a risk that the CD ladder rates you have locked in do not keep up with inflation, especially when the economy is going through troubled times.
If a CD ladder is not the best option for you based on these downsides, certain alternatives like a high-yield savings account or brokerage account might be a better fit to consider.
Steps to create a CD ladder
Creating a CD ladder is simple. Here are four steps for building a CD ladder:
- Determine savings amount: First, decide how much you want to deposit in CDs. Keep in mind that the total you want to deposit does not mean you won’t have access to all those funds for a long time because of the ladder structure of this savings strategy. However, know that you usually cannot withdraw funds before maturity date without incurring early withdrawal penalty.
- Choose ladder structure: Next, select the number and terms of CDs (e.g., 6 months, 1 year, 2 years). This is how many steps you want to have on your ladder. Remember that the longer the term, the higher the interest rate is usually.
- Open and fund CDs: Next, you will want to divide the total funds you decided to invest in the first step equally among selected CDs, making sure each step of the ladder has an equal amount is key to a balanced ladder strategy.
- Reinvest or withdraw: Lastly, you will wait for each CD in each step of the ladder to mature. Once it matures, you will decide whether to reinvest funds into additional CDs, making your ladder taller, or withdraw the funds to use.
When is a CD ladder a good choice?
Still not sure whether a CD ladder savings strategy is the best choice for your financial situation? Consider these scenarios where a CD ladder is most beneficial:
- Best for savers looking for steady returns with low risk.
- Ideal for short-term and medium-term financial goals.
- Suitable for individuals looking for fixed interest rates.
CD ladder rates and how they compare
CD ladders will consist of varying rates as the structure of the ladder involves investing your money in different CDs with different rates. The rate of each CD in the ladder depends on bank policies, term lengths, and current market conditions. For example, your CD ladder might consist of a one-year CD with an interest rate of 3% and a two-year CD with an interest rate of 3.5%, and a three-year CD with an interest rate of 4%. Generally, the longer the term length and the more money you deposit, the higher the savings. CDs also generally have higher interest rate options than traditional savings accounts and money market accounts.
Final thoughts: CD ladders
Hopefully after reading all these details about CD ladders, you have a better understanding about what a CD ladder is, how it works, the benefits and drawbacks, and whether it is a good option for you to invest your savings into. Take some time to consider the benefits and drawbacks before setting one up.
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
