How to Create a CD Ladder (And Why It’s Worth Considering)

CD Ladder

There are numerous ways to save and grow your money, and one effective strategy is to build a CD ladder. A CD, or Certificate of Deposit, is a type of savings product that typically offers a higher interest rate than a traditional savings account.

When you deposit your money into a CD, it’s locked in that account until it reaches its maturity date. Withdrawing the money before maturity often incurs a penalty fee. CDs are FDIC-insured and can be a solid option if you’re looking to grow your money over a few months or years without the temptation to spend it. Here’s a closer look at what a CD ladder is and why it might work for your financial goals.

WHAT IS A CD LADDER?

A CD ladder involves opening several CDs with staggered maturity dates, allowing your money to grow while maintaining some liquidity. Instead of tying up all your funds in a single CD, you spread your investment across multiple CDs with varying terms.

For example, if you have $5,000, you might open five CDs with $1,000 each:

  • $1,000 in a 12-month CD
  • $1,000 in a 24-month CD
  • $1,000 in a 3-year CD
  • $1,000 in a 4-year CD
  • $1,000 in a 5-year CD

This setup allows you to access some of your money each year while earning interest on the remaining CDs. Typically, the longer the term of the CD, the higher the interest rate.

OTHER BENEFITS OF BUILDING A CD LADDER

With a CD ladder, you diversify your savings across multiple CDs, reducing the risk of putting all your money in one place. CD rates are fixed, so you don’t have to worry about losing money or fluctuating interest rates. While investing in the stock market can be beneficial, a CD ladder offers a more stable, less risky way to grow your money.

You can also keep reinvesting money into new CDs as the ones in your ladder system mature, further enhancing your savings strategy.

HOW TO START A CD LADDER

If you’re ready to start a CD ladder, follow these steps:

DETERMINE HOW MUCH YOU WANT TO START WITH

CDs offer a guaranteed rate of return, so decide how much you’re comfortable setting aside. Some banks have minimum deposit requirements, often around $500. Starting with $1,000 to $3,000 is ideal for building a ladder with multiple CDs. Ensure you’re comfortable with having this money locked away, as early withdrawals typically incur penalties.

CHECK INTEREST RATIOS

CD interest rates vary, so monitor the market for changes. Searching for “best CD rates” online can help you find the most current rates and best offers. While current rates may not be as high, you can still earn more than you would with a traditional savings account.

DETERMINE HOW MANY CDS YOU WANT AND WHEN THEY SHOULD MATURE

Consider how you want to structure your ladder. For instance, Ally Bank has a CD ladder calculator to help you determine the best allocation. Here’s an example with a $6,000 deposit:

  • $500 in a 12-month CD
  • $500 in a 24-month CD
  • $1,000 in a 3-year CD
  • $2,000 in a 4-year CD
  • $2,000 in a 5-year CD

CONSIDER REINVESTING ONCE CDS MATURE

Keep your CD ladder going by reinvesting in new CDs as the old ones mature. With the interest earned, you’ll have more money to invest, allowing for compound growth. If you need the funds, you can take a break and continue the ladder later.

SUMMARY

Creating a CD ladder can help diversify your savings and reduce the temptation to spend. With fixed rates and staggered maturities, you have access to cash each year if needed. While a CD ladder may not provide enough returns for retirement, it’s a valuable tool to complement your overall savings strategy.

 

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