How to Create a CD Ladder to Maximize Your Savings

May 11th, 2023

As we discuss in our post, 6 Habits of Successful Savers, finding the right vehicle for your savings is one of the most important aspects of creating a successful savings plan. While making regular deposits in your savings account is a great way to accumulate funds, utilizing products that generate more interest, like high-interest CDs, is essential if you want to accelerate your savings and stay ahead of inflation.

Unfortunately, for many individuals, CDs have one major disadvantage: you can’t access your money during a CD’s term. And because the longer the term, the higher your interest rate usually will be, this means that the best interest rates often feel out of reach to many savers who may not feel comfortable putting their money aside for long periods of time.

However, by using CD laddering—opening a series of individual CDs at different term lengths—you can have the benefits of increased accessibility paired with the earnings of longer term lengths. Curious how this savings strategy works in action? Keep reading to learn more!

What is a Certificate of Deposit (CD)?

A certificate of deposit, often shortened to ‘CD’, is a time deposit product—a bank account that is opened for a set period of time. Similar to a bond, in exchange for higher, guaranteed interest rates, these funds won’t be accessible to you during this time. Once the CD matures at the end of its set term, you can choose to renew it or withdraw the funds. There is a grace period for you to renew or withdraw (at The First, our grace period is 10 days). If you choose to do nothing, the CD will automatically renew for the same term, at today’s market interest rate.

Although you generally won’t have access to funds during the CD’s term, certificates of deposit come in a variety of term lengths, affording some flexibility. The First has CDs that range from 90 days to 60 months, so you can be sure to find an account that is right for your needs. Keep in mind, if you do need to withdraw funds before the CD matures, you may forfeit your earned-interest or have to pay a penalty.

In addition to offering a guaranteed rate of return, CDs are federally-backed deposit accounts, insured by the FDIC for up to $250,000. This makes them especially safe investment tools for growing your long-term savings.

What is CD Laddering and how does it work?

Generally, the longer the term a CD has, the higher the interest rate you’ll receive. However, a potential drawback of putting all of your available investment funds into one, long-term CD to get those higher rates is that you lose liquidity—the ability to access and use your cash, should the financial need arise or you want to reinvest it in a more lucrative option. CD ladders allow you to have the best of both worlds—increased liquidity while still taking advantage of higher interest rates associated with longer-term CDs.

So, what are they and how do they work?

CD laddering is an investment strategy where you open multiple CDs that have different term lengths. When you make a CD ladder, you stagger your CDs maturity dates so that individual CDs come due at regular intervals. For instance, you might invest $5,000 in five individual $1,000 CDs at varying term lengths (and interest rates): a one-year CD, a two-year CD, a three-year CD, a four-year CD, and a five-year CD. With this arrangement, you will have one CD coming due every year for five years.

As each CD comes due, you can decide what you want to do. You can choose to:

Reinvest your funds in a new, long-term CD, extending your CD ladder.
Reinvest the funds in a CD of a different length (longer or shorter).

Invest the funds using an alternative investment method.
Keep those funds liquid, transferring them to a checking account to use for upcoming expenses.

If you choose to reinvest your CDs at the longest term length, eventually all your CDs will have that same longer term length.

As we mentioned above, CD ladders allow you to benefit from the higher interest rates of those longer CDs, while also gaining access to a portion of your funds on a regular basis. On top of this, they afford some additional flexibility: if you do need to withdraw some of your money before a given CD reaches maturity, you’ll only lose interest on that one CD—not your entire investment.

How to plan your CD Laddering strategy

Planning a CD ladder involves a number of different considerations, from determining how much money you want to invest and how long you want to invest it to how many different CDs you want to manage in total. Let’s take a look at each of these points.

How much money you invest will depend on a few factors, including minimum opening requirements and how much money you can reasonably set aside in a low-access savings product. Most banks have a minimum amount you need to deposit to open a CD. At The First, our minimum opening requirement is $500 per CD. Ideally a CD ladder would have at least three CDs, meaning that you should have at least $1,500 to work with. When determining how much money you want to use to set up your ladder, keep in mind that these should be funds you probably won’t need to access in full in the next few years (or the length of your longest term).

You’ll also need to decide on the maximum CD term you’d like. If you’re using a CD ladder for a specific long-term saving goal (like retirement or purchasing a home), it can be easy to set a limit for your longest CD. However, you may also make your decision based on maximizing current rates—choosing the longest term you are comfortable with to take advantage of the best rates available.

The final thing to consider is how complex you would like to make your CD ladder. The more CDs you have, or the more frequently they come due, the more effort it will take to manage your CD ladder. However, keeping things simple does have some tradeoffs. For instance creating a three-year ladder instead of a five-year ladder means that you won’t benefit from those better rates for five-year CDs. Additionally, having CDs come due less often—every two years instead of every year for instance—means your access to those funds will be more limited.

Sample CD Ladders

Here are a few CD laddering examples to help you determine which configuration may work best for you.

Our first investor has a $2,000 budget and is looking to start growing their nest egg. They decide to keep their investment simple, opening three CDs with maturity dates spaced apart every two years. They plan to continuously renew them for new, five-year terms as each CD comes due:

One-year (12-month) CD: $600
Three-year (36-month) CD: $700

Five-year (60-month) CD: $700

Our second investor has an $8,000 budget and wants to invest their funds to purchase a home in two years. However, they also want to keep their options open, keeping their funds as accessible as possible in case they decide to purchase a home sooner or need the money for other expenses—or having the option of renewing CDs should they delay purchasing their home. They decide to open four CDs, maturing every six months:

6-month CD: $2,000
12-month CD: $2,000

18-month CD: $2,000
24-month CD: $2,000

Our third investor has a $50,000 budget for investing and wants to take advantage of today’s higher rates. This investor has no specific goals other than to maximize their earned interest. Should better investment options arise, they want to be able to occasionally access their funds to take advantage of those opportunities. They opt to open five CDs, which maturity dates spaced one year apart:

One-year (12-month) CD: $10,000

Two-year (24-month) CD: $10,000
Three-year (36-month) CD: $10,000
Four-year (48-month) CD: $10,000
Five-year (60-month) CD: $10,000

On one hand, the great thing about CD ladders is that they are extremely customizable depending on your unique goals and financial circumstances. On the other hand, all this flexibility may make creating the right CD ladder feel a bit complicated, especially if you are new to CDs. If you have any questions about building your own CD ladder, stop by your local First branch to work one-on-one with a member of our banking team and find the right solution for your needs.

Start Saving with a CD from The First

Certificates of Deposit from The First make an excellent savings product for beginning savers to seasoned investors, with flexible term lengths to meet a variety of needs. Whether you want to customize a CD ladder for your long-term savings goals or just get the ball rolling with one certificate, we can help you create a savings plan that works for you.

Check out our current CD rates, or contact a local community banker at The First to discuss your savings needs and open a CD account today!