What is CD Laddering?

A ladder to illustrate the concept of CD laddering.

CD laddering can help maximize returns while allowing access to some of your funds.

CD (Certificate of Deposit) laddering helps navigate the territory between the benefits of liquidity and the appeal of higher yields. CDs typically offer higher returns for longer terms, but tying up funds for years on end can be a tough choice. While the difference between a 1-yr CD and a 5-year CD have been less dramatic recently, laddering allows you to take advantage of higher rates when offered, while having a rolling opportunity to access your cash if you need it.

How CD Laddering Works

In a scenario where you have $25,000, you might consider putting the whole amount into one longer term CD, but with the very recent trend of increasing CD rates, CD laddering might be the smarter choice. You might instead divide that amount among five different length CD terms…a 1-year, 2-year, 3-year, etc. That way in just a year, you’ll have the opportunity to shift $5,000 to another 5-year higher yield OR you can access part of the funds if needed. The process repeats every year from here allowing you to continue building your ladder. It’s the perfect middle ground between liquidity and guaranteed returns. Returns that will undoubtedly exceed savings account rates.

CD Laddering as a Quarterly Cash Flow Strategy

Some investors set up CD ladders to create monthly/quarterly cash flows. By opening short-term CDs (3-, 6-, 9- and 12-month terms), you can quickly create a quarterly dividend program. While the term is relatively short, and therefore the interest earned somewhat lower, you can set up the “ladder” to reinvest only the initial deposit while receiving a quarterly check for the interest accrued.

Staying on Top of the CD Ladder

A successful CD laddering strategy rests on diligent tracking of the CDs maturity dates. By law, the bank must inform you nearly 3 weeks before, but by keeping the dates on a calendar, you’ll have plenty of time to determine your next move.

Starting Your CD Laddering Investment

The great thing about CD investments is that they’re easy to understand, federally insured and provide a guaranteed return. In addition, you can get started with relatively low deposits and choose terms for your laddering strategy that suit your financial plan. Because of the variety of terms available, the flexibility of CD laddering is extraordinary. Partner Colorado offers a number of different CD products, terms and rates, ideal for this type of strategy.