CD Ladder – What You Should Know


Are you looking for a low-risk investment strategy? Have you heard of a CD Ladder yet? If not, allow me to share this little nugget of knowledge with you.

You may already know that saving money is essential these days. You may also know that investing your money is probably wise. However, you may be wary of the risk, feel that you don’t have enough money to start, or that you may not know enough about investing to dive in. If any of these concerns describe you, then a CD Ladder might be suitable for you.

A CD Ladder is an investment strategy that decreases the risk of investments while maximizing interest opportunities each year. In this strategy, you divide your initial investment into equal amounts and put it all into CDs, each with a different maturity date.

So, for example, let’s say that you have been putting your money into a Money Market account for a while now, and you have accumulated enough extra funds to start getting serious about investing. Let’s also say that the available funds are about $5,000. Here’s an example of what you could do.

NOTE: The following is just one example of many strategies that could be employed. Interest rates vary between institutions and flux all of the time. The following is strictly for demonstration purposes.

To set up a CD Ladder, you would take your $5,000 and split it up equally into five different CDs with different maturity dates (as shown below). The idea is to stagger them so that each year, you will have one of your CDs mature. Allow me to demonstrate.

  • CD #1 – $1000.00 in a 12-month CD at 1.25%
  • CD #2 – $1000.00 in a 24-month CD at 1.45%
  • CD #3 – $1000.00 in a 36-month CD at 1.60%
  • CD #4 – $1000.00 in a 48-month CD at 1.76%
  • CD #5 – $1000.00 in a 60-month CD at 2.20%

So after one year, CD #1 will mature. At that time, you will want to re-invest ALL of those funds into a new 60-month CD. Meanwhile, the other four CDs will continue to grow. There is nothing more to do until the following year.

When your second year rolls around, CD #2 will mature. Like before, you will want to renew ALL of the funds from CD #2 into a new 60-month CD. And like before, the remaining four CDs will continue to grow. There is nothing more to do until the following year.

This process will go on each year, and you will re-invest ALL of your funds into a new 60-month CD. When you get to your fifth year, you will once again renew ALL of your funds from your 60-month CD into another 60-month CD. Now, all five of the CDs you own are 60-month CDs, earning the maximum interest offered during renewal and with one of your CDs maturing each consecutive year.

Some would call this part of the process “Auto-Pilot.” This is because your CDs will now renew automatically into new 60-month CDs at the future rate. This could be higher, or it could be lower. Regardless, it will likely be a higher rate of return than your savings or money market.

And because your funds are staggered, not only will you be able to take advantage of the higher rates when you renew, but this strategy will also protect more of your funds longer if rates dive temporarily. A couple more benefits include that the entirety of your funds are not locked away as better rates emerge, and you will never be more than a year out from having access to a portion of the funds.

Again, you need to remember that rates may differ when you are ready to build your ladder. Rates are also subject to change with each renewal. Of course, you can always choose not to renew. On the other hand, you could also add money to a CD before renewing it. Remember that if you keep that money working, it continues to compound and grow over time. If interest rates rise, your ladder will slowly increase with them.

Consider the example provided in this article to give you a rough idea of how well this work. Keeping it simple and pretending that rates would remain the same, if I followed the ladder precisely as planned, the estimated value after 60 months would be about $5,539.35. This is miles better than what basic savings or a single 12-month CD would provide.

Now, there will come a time when you have been working on a few different financial strategies. For instance, you may have a money market alongside your CD Ladder. When your funds begin to accumulate, and you have a decent amount built up, that might be a great time to have a serious discussion and financial analysis with your institution’s Retirement and Investment Services Representative. They may be able to grow your money even more.

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