CD ladder: What it is and how to build one

The article was first published on Bankrate.com.

A CD ladder is a savings strategy where you invest in several certificates of deposit with staggered maturities to take advantage of higher rates on longer-term CDs while still keeping some of your funds accessible.

If you put all of your savings in a long-term CD, you won't get the benefits of this strategy.

An example of how to setup a ladder. A five-year CD ladder with five rungs is what you would like to build. If you have $2,500 to invest, you can split it into five CDs with different maturities.

After the first CD matures, you can either cash out or continue to build your ladder by investing the funds in a new five-year CD. Use the money from the account to open a new CD when the two-year CD matures. You should continue the process for as long as you want.

You can open each CD with different balances to get a higher yield. If you aren't in need of those funds, you may want to invest more in longer-term CDs with high rates. There is a penalty for withdrawing funds before the maturity date.

There is no obligation to open all of your CDs at the same bank. It is advisable to shop for the best CD rates for each term.

Benefits of a CD ladder

• CDs offer a guaranteed rate of return.
• You can take advantage of higher rates on longer-term CDs without locking up all of your money for multiple years.
• If rates continue rising, you can reinvest the money from shorter-term CDs into new accounts to lock in higher APYs.
• You have easy access to your money if you need it (though early withdrawal penalties may apply).

Drawbacks of a CD ladder

• Although CD rates have increased significantly over the past year, they’re still outpaced by inflation.
• You could be missing out on higher returns from more aggressive investments, such as stocks or bonds.
• If interest rates are declining, you might be reinvesting the money from a matured CD into lower rates.

Are CD ladders a good investment?

A CD ladder can help you make money. The ability to access a portion of your savings each time a CD matures is another benefit.

If rates decline, you could miss out on the chance to earn a better rate if you invest in shorter term CDs. It is possible that you will lose out on better returns offered by other investment vehicles.

Before you commit to a CD ladder, consider your reasons. It may be a good fit for your short-term savings goals, but a long-term savings effort may require an additional boost from other investment vehicles.

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