Certificates of Deposit (CDs)

A Guide to CD Laddering

Navigating the world of savings and investments can feel like a balancing act—especially when you’re aiming for both stability and growth. One strategy that strikes that fine balance is CD laddering.

CD laddering is a simple yet effective way to ensure a steady flow of income while keeping your savings secure. Let’s break down the benefits of CDs, what CD laddering is, why it could be a helpful financial strategy, and how you can build a CD ladder.

What Are the Advantages of CDs?

A certificate of deposit (CD) is a savings tool offered by banks and other financial institutions that locks in a specific amount of money for a predetermined period—rewarding savers with interest over time. The appeal of CDs lies in their safety and higher interest rates compared to regular savings accounts, especially for funds that aren’t needed in the immediate future. To start a CD, a minimum initial deposit is often required.

Benefits of CDs can include:

  • Safety: CDs are among the safest investments. As long as you buy your CD through an FDIC-insured bank, the money held in that CD is insured up to the applicable FDIC limits.
  • Higher returns: CDs typically offer better interest rates in exchange for less liquidity compared to standard savings accounts.
  • Fixed interest rates: The interest rate of a CD is set for its term, offering predictability and security.
  • Encourages savings: The penalty for early withdrawal from a CD can deter unnecessary spending. That can help you stick to your financial plan and avoid impulse spending.

Learn more about CDs and their advantages.

What Is a CD Ladder?

A CD ladder is an investment strategy that involves distributing funds across multiple CDs with varying terms, from short to long. This method balances the desire for high interest rates with the need for periodic access to funds—offering flexibility and the potential to capitalize on rising interest rates by reinvesting matured CDs at potentially higher rates.

How to Create a CD Ladder

Building a CD ladder involves four simple steps:

  1. Decide on your investment amount. Determine the total amount you want to invest in CDs, considering your overall budget and financial goals.
  2. Select the term lengths. Choose a variety of term lengths to meet both immediate and future financial needs, ensuring some funds are accessible while others grow.
  3. Open the CDs. Split your total investment amount across several CDs with staggered maturity dates. This creates the “ladder” that grows and offers periodic access to your money over time.
  4. Reinvest. As each CD matures, reinvest in new CDs, maintaining access to funds while seeking higher interest rates.

Example of CD Laddering

Imagine you have $10,000 to invest. Instead of putting all your money into a single CD, you divide it into four $2,500 CDs with terms ranging from one to four years. Here’s a simplified breakdown:

  • Year 1 CD: $2,000 at a 1-year term
  • Year 2 CD: $2,000 at a 2-year term
  • Year 3 CD: $2,000 at a 3-year term
  • Year 4 CD: $2,000 at a 4-year term

As each CD matures starting from the first year, you have the option to use the money or reinvest it in a new CD. This process not only gives you access to parts of your investment yearly but also helps you take advantage of potentially higher interest rates over time.

Is a CD Ladder Right for You?

CD laddering is ideal for individuals who want a low-risk investment strategy that offers regular, predictable returns. It’s particularly effective for those with specific future financial goals or expenses, such as retirement or education costs, allowing for strategic planning and investment growth over time.

Tips for Managing Your CD Ladder

Stay informed about interest rate trends and adjust your strategy accordingly, whether that means locking in longer-term rates in anticipation of a decrease or opting for shorter terms if rates are expected to rise. Use calendar reminders to manage maturity dates and reinvestment plans effectively, ensuring your CD ladder remains aligned with your financial objectives.

Central Bank Can Help

At Central Bank, we understand the importance of a financial strategy that balances growth with security. Our CD solutions are designed to provide you with a stable income stream while keeping your investments safe. With a range of CD options and terms, we can help you plan and maintain a CD ladder that aligns with your financial goals. 

See our latest CD specials, or contact us to get started.