What is CD Laddering? Understanding this Savings Strategy

When you're looking to grow your savings, certificates of deposit (CDs) can offer higher interest rates than traditional savings accounts. But one common concern keeps some savers from taking advantage of CDs: locking up their money for an extended period.

That's where CD laddering comes in.

A CD ladder is a savings strategy that helps you potentially earn higher rates while maintaining regular access to your funds. By spreading your savings across multiple CDs with different maturity dates, you can create a rolling schedule that gives you flexibility and predictable access to cash.

What is a CD Ladder?

A CD ladder is a savings strategy that involves dividing your money among several CDs with staggered maturity dates.

Instead of putting all your savings into one long-term CD, you spread the funds across multiple CDs that mature at different times. As each CD reaches its maturity date, you can either access the money or reinvest it into a new CD to keep the ladder going.

Example of a CD Ladder

Let's say you have $20,000 to save.

Rather than putting the entire amount into a single 5-year CD, you might divide it like this:

• $4,000 in a 1-year CD
• $4,000 in a 2-year CD
• $4,000 in a 3-year CD
• $4,000 in a 4-year CD
• $4,000 in a 5-year CD

After one year, your first CD matures. At that point, you can:

• Withdraw the funds if you need them
• Reinvest them into a new 5-year CD
• Explore other savings options based on your financial goals

Each year, another CD matures, creating a predictable cycle of access to your money.

How does CD Laddering work?

The goal of laddering is to balance three key savings objectives:

1. Earning competitive interest rates
2. Maintaining periodic access to funds
3. Reducing the need to predict future interest rate movements

As each CD matures, many savers choose to reinvest the proceeds into a new long-term CD. Over time, the entire ladder becomes made up of higher-term CDs, which often offer stronger rates than shorter-term options.

This creates a rolling schedule where a portion of your savings becomes available at regular intervals.

Benefits of CD Laddering

Regular access to your money

One of the biggest advantages of a CD ladder is liquidity.

Instead of having your entire balance locked into a single CD, portions of your funds become available on a recurring basis. If your needs change, you'll have opportunities to access cash without waiting years for an account to mature.

Potential for higher returns

Longer-term CDs frequently offer higher interest rates than shorter-term CDs. A ladder allows you to take advantage of those longer terms while avoiding the commitment of placing all your savings into a single account.

Reduced interest rate risk

Trying to predict where interest rates are headed can be difficult.

If you lock all of your funds into a long-term CD and rates rise soon afterward, you could miss out on better opportunities. Conversely, if rates fall, short-term CDs may need to be renewed at lower yields.

A ladder helps spread out that risk by allowing portions of your savings to mature regularly, giving you periodic opportunities to reinvest at current market rates.

Flexible financial planning

CD ladders can help support a variety of savings goals, including:

• Building an emergency reserve
• Saving for a future home purchase
• Planning for education expenses
• Setting aside funds for retirement income
• Preserving capital while earning interest

Because maturities occur on a schedule, a ladder can provide greater predictability than other savings vehicles.

Is CD Laddering right for you?

CD laddering may be a good fit if you:

• Want a low-risk savings strategy
• Have funds you don't need immediately
• Prefer predictable returns over market volatility
• Want regular access to a portion of your savings
• Are saving toward medium- or long-term goals

However, if you anticipate needing all of your money in the near future, a high-yield savings account or money market account may offer greater flexibility.

Common questions about CD Laddering

How much money do I need to start a CD Ladder?

The amount depends on your bank's minimum CD deposit requirements. While larger balances can create more flexibility, many people can begin a ladder with a modest initial investment.

What happens when a CD matures?

When a CD reaches maturity, you can typically withdraw the funds, transfer them to another account, or reinvest them into a new CD term.

Can I withdraw money before a CD matures?

Most CDs assess an early withdrawal penalty if funds are removed before maturity. That's why laddering can be attractive; it creates scheduled access points that may reduce the need for early withdrawals.

How many CDs should be in a ladder?

There's no one-size-fits-all answer. Some savers use three CDs with maturities spread across several years, while others prefer five or more rungs to create more frequent access opportunities.

Building a CD Ladder: A simple process

Creating a CD ladder typically involves four steps:

1. Determine how much you want to save.
2. Divide that amount among several CDs with different maturity dates.
3. Allow each CD to mature according to its schedule.
4. Reinvest maturing CDs into longer-term CDs if you want to maintain the ladder structure.

The result is a savings strategy that can offer a balance between earning competitive returns and maintaining ongoing access to your money.

The bottom line

A CD ladder is a simple yet effective way to make your savings work harder while keeping funds available on a rolling basis. By staggering CD maturity dates, you can potentially benefit from higher rates, reduce interest rate uncertainty, and create regular opportunities to access or reinvest your money.

For savers looking to strike a balance between growth, security, and flexibility, CD laddering can be a valuable addition to an overall savings strategy.

Ready to get started? Webster Five offers CDs with a variety of terms to help you build your CD ladder.