What Is CD Laddering and Should You Try It?

If you’re looking for a way to grow your savings while maintaining some liquidity, CD (certificate of deposit) laddering could be a smart strategy. This method allows you to take advantage of higher interest rates without locking up all your money at once. But is it right for you? Let’s take a closer look.

What Is CD Laddering?

CD laddering is a strategy that involves dividing your savings among multiple certificates of deposit (CDs) with different maturity dates. Instead of investing all your money in a single long-term CD, you stagger your savings so that some CDs mature sooner than others.

For example, if you have $10,000 to invest, you might:

• Put $2,500 in a 1-year CD

• Put $2,500 in a 2-year CD

• Put $2,500 in a 3-year CD

• Put $2,500 in a 4-year CD

As each CD matures, you can choose to cash it out or reinvest it into a new CD, keeping the ladder going.

Why Consider CD Laddering?

CD laddering offers a balance between earning higher interest rates and keeping some of your money accessible. Here’s why it might be a good choice:

• Better Interest Rates – Long-term CDs sometimes offer higher rates than short-term ones.  A ladder lets you take advantage of those better rates while still having CDs that mature sooner.

• Regular Access to Funds – Since a portion of your money becomes available at regular intervals, you don’t have to wait years to access your savings.

• Reduced Interest Rate Risk – If rates go up, you won’t be stuck with all your money in a low-rate CD. You can reinvest maturing CDs at new, higher rates.

Pros and Cons of CD Laddering

Like any investment strategy, CD laddering has its benefits and drawbacks.

Pros:

• Higher interest rates than a traditional savings account
• Flexibility with access to funds at staggered intervals
• Lower risk compared to stocks or bonds

Cons:

• Interest rates may not always be favorable when it’s time to reinvest
• You’ll need to wait for CDs to mature to access all of your funds without a pre-payment penalty.
• If rates fall, you could end up reinvesting at lower rates

Is CD Laddering Right for You?

CD laddering is ideal for savers who want to earn higher interest on their money.  If you don’t need immediate access to your money, but don’t want all your funds tied up for years, this could be a great strategy.

Before you start, compare interest rates, terms, and associated fees. to find the best options for your ladder. With careful planning, CD laddering can help you grow your savings with confidence.