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  • Writer's pictureKayla

What Is CD Laddering & How Does It Work?

Updated: Feb 22


Have you ever felt like your savings strategy could use a little extra oomph? Well, you're in for a treat because we're diving into the fascinating world of CD laddering.


CD laddering, if it’s right for you, can be a game-changer when it comes to saving for the future. In this quick read we'll unlock the basics and discover the potential benefits to this creative savings strategy. Let's jump in! 


What is a CD?


A Certificate of Deposit (CD) is a product offered by certain financial institutions that allows individuals to deposit a specific amount of money for a fixed period, typically ranging from a few months to several years, in exchange for a predetermined interest rate. A CD offers several benefits, including a fixed interest rate that can be higher than a regular savings account, a predetermined maturity date that allows for simpler financial planning, and a low-risk investment with FDIC insurance protection, ensuring the return of the principal amount. 


One thing to remember when considering investing in CDs is that once invested, your funds will not be available to you (without paying a potentially hefty penalty for early withdrawal) until the CD matures — hence the CD laddering strategy described in the next section.


Additionally, it’s important to keep track of when your CD matures, as certain banks require you to withdraw funds within 7-10 days of maturity. Failure to do so may result in the institution renewing the CD at the current rates, so be sure to check the policies of the institution where you’re saving.


What is CD Laddering?

Imagine you have a bunch of cookies, but you want to save some for later instead of eating them all at once. Now, let's say each cookie is like money you want to save. You want access to some of the money (cookies) sooner and some down the road at different times, and you want the potential to earn more interest than a regular savings account may offer. This is where CD laddering can be a useful tool.


Here's how it works: Instead of putting all your cookies in one big jar (CD), you spread them out into different jars (CDs) with different maturity dates. Just like you have cookies ready sooner in one box and some later in another box, you have CDs that mature at different times.


So, for example, when the CD with the shortest maturity date reaches maturity, you’ll have access to those funds (cookies!) while the money invested in the CDs with longer maturity dates can stay invested and benefit from continued accrual of interest. It's like having a cookie party at different times instead of eating all your cookies at once!


While CD laddering can be a powerful tool for short to medium-term goals, it's essential to consider how this fits into your overall financial plan, and if CD laddering is a strategy that’s appropriate for you. 


Need help determining if CDs and a CD laddering strategy fit into your overall financial plan? Feel free to reach out to us! We’re happy to help.


What Are Some Potential Benefits of CD Laddering


  1. Access to Money: Because you have CDs maturing at different times, you'll have access to your money periodically. This can be particularly useful for emergencies or planned expenses.

  2. Higher Interest Rates: Longer-term CDs typically offer higher interest rates than short-term ones. By laddering, you give yourself the ability to take advantage of these higher rates while still having some liquidity for funds you’ll need sooner.

  3. Less Exposure to Interest-Rate Risk: CD laddering can help spread the risk of interest rate changes. If interest rates go up, you can opt to reinvest the funds from your matured CDs at higher rates if you’d like to. If they go down and your CD is not at maturity yet then the funds in that CD won't be affected by what interest rates are currently doing. 

  4. Predictable Savings: When you invest in a CD you know what the yield will be at the point of investment, and as a result, CD laddering can provide a more predictable way to save and earn interest over time. 

  5. Diversification: By spreading your money across multiple CDs with different maturity dates, you can diversify your savings strategy.

The Bottom Line on CD Laddering

Overall, CD laddering can be a conservative and low-risk strategy for saving and earning interest if done properly. It can be a good choice for people who want to keep their money safe, need access to it periodically, and still want to earn a bit more interest than what a regular savings account might offer. It's important to shop around and compare the CD rates offered by different institutions to find the best rate for you.


Ready to take your financial planning to the next level? Contact us for a personalized consultation, and let's work together to build a robust financial strategy tailored just for you.

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