How CD Laddering Can Make Your Money Work Harder

If you’re not totally comfortable with the ups and downs of the stock market, and your high-yield savings account isn’t growing fast enough, there’s a middle-ground strategy that could work for you called CD laddering.

It’s straightforward, low-risk, and doesn’t require you to obsess over financial market charts or news. Here’s how it works!

First, What’s a CD (Certificate of Deposit)?

A CD is basically a savings product you can get from a bank or a credit union. You agree to keep your money in the account for a set amount of time, the most common being 6 months, 1 year, 5 years, etc, and in return, the bank pays you a fixed interest rate. This rate is typically higher than the standard savings account rate. 

You can’t withdraw the money during your agreed-upon time without incurring a penalty, but it’s a low-risk option, as it’s FDIC-insured up to $250,000 and comes with a guaranteed return. No surprises and no stock market stress!

What is CD Laddering? How Can It Benefit You?

Instead of dumping all your savings into one CD, CD laddering spreads your money across multiple CDs with different maturity dates. 

This can benefit you as it’ll create a system where parts of your money become available on a regular schedule, like every year, while the rest of your money keeps growing. You’ll get better rates than a savings account, and you don’t lose all your liquidity since money will be freed up regularly.

Visualize it like you’re building a staircase. Each step is a CD that matures over time, giving you both access and returns along the way.

Why CD Ladders Are a Great & Smart Option for the Cautious

• Better interest rates: Long-term CDs usually offer higher rates, and a ladder lets you take advantage of those while still keeping some cash accessible.
• Regular access to your money:  When each CD matures, you can choose to cash out or reinvest, so you won’t feel stuck for too long. 
• Protection against rate changes: CD rates don’t have a regular schedule, but banks and credit unions set their rates based on factors like inflation, economic conditions, competition with other institutions, and more. You can’t predict rates, and they can often change based on the bank, but securing at a certain rate for an X amount of time will protect you from any changes.
• Built-in flexibility: Your financial situation might change at any time, so laddering gives you more options than locking all your money away
• No guesswork or gambling: Unlike the stock market, your return is guaranteed. No worrying about crashes or volatility. 
• Steady cash flow: Every time a CD matures, you get a small payout, which is great for covering expenses or adding back to your savings. 
  

How to Build a CD Ladder

1. Decide how much you can invest

Review your budget to determine how much you can afford to save for the next few years. This doesn’t need to be your entire savings, just the portion you won’t need in the short term.

2. Pick your ladder timeline.

A common setup is a 5-year ladder where you divide your money equally between 1-year, 2-year, 3-year, 4-year, and 5-year CDs. One CD matures yearly, and you can use the money or reinvest it into a new 5-year CD to keep the ladder going.

For example, if you have $10,000, you would divide your money like this:

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

3. Shop for the best CD rates

You don’t have to stick with your usual bank. Look at credit unions or online banks, too. Some offer way better rates, but make sure they’re FDIC or NCUA insured (Federal Deposit Insurance Corporation and National Credit Union Association)

Some 1-year CD options include Marcus by Goldman Sachs (4.25% APY), Bask Bank (4.40% APY), Bread Savings (4.10%), T Bank (4.50%)

4. Keep track and reinvest as you go

As each CD matures, repeat the process. Reinvest in a longer-term CD with the best available rate, and your ladder will stay active and earning. As your financial situation changes, you can shift your goals over time. 

The Money Move

CD laddering is an underrated savings strategy that can help anyone hesitant about investing too much in the market outside of a 401(k) or Roth IRA. You’ll get predictable growth and the freedom to access your money regularly.

If you’re looking for a stable, low-maintenance way to make your savings do something while you sleep, this could be the strategy for you. Let your money work harder for you without all the stress!