Use a CD Laddering Strategy to Maximize Savings

The Pros & Cons of Creating a Certificate of Deposit Ladder

Oct 27, 2009

Those looking to use CDs (certificates of deposit) may find that they can maximize their savings returns by building up a CD laddering system. How does this work?

Investing savings in certificates of deposit may not give the individual the highs of standard investments if markets boom, but they also won't get the negatives either. This can be a good way of saving with higher interest rate returns than standard deposit accounts without risking the invested capital. But, rather than take out a single CD or multiple products on a periodic basis, many will put together a CD laddering strategy. How is this done and what are the benefits?

What is CD Laddering?

Those looking to set up a certificate of deposits ladder aim to spread their investment across a variety of CDs rather than pushing all of their cash into one single product. The aim here is to start out with a few different investments in separate products that all have different maturity dates. So, for example, the individual could split their cash between five products that have 1, 2, and 3 year terms respectively.

The ladder that is built here can be small or large, depending on the preference of the investor. With the above example, the first rung of the ladder would be the 1 year CD, the second would be the 2 year product and the third would be the 3 year one. The aim with laddering is to keep on building the rungs of the ladder once it has been set up and every time one of the CDs reaches the end of its term.

So, at the end of the first year when the 1 year CD matures and drops off the ladder, the individual's remaining products would all move down it. The 2 year product would now be on the first rung of the ladder and the 3 year one would be on the second. The aim now is to keep rebuilding the top end to compensate. The individual would, therefore, now buy a new 3 year CD with the proceeds from the 1 year product that has just ended.

What are the Benefits of a CD Ladder?

The individual could, of course, simply stash all their money into one long-term CD. But, to get the best rates this may involve not being able to access their cash without penalty charges for many years to come.

Plus, if interest rates are not great at the time of issue, they may not see the best returns. Opting to buy lots of different 1 year options instead would improve cash liquidity but, again, may not give a fantastic return on investment.

Using a CD ladder may help to smooth out the ups and downs of investment. The individual will never be investing all of their money in one product and will be able to take advantage of the markets when they are good as they will potentially be re-investing every year.

If markets dip then they could simply change strategy for a while and go for shorter term options until they pick up again. Plus, this strategy also allows them better access to their money on a short-medium term basis without having to pay penalty fees for early withdrawals.

Are There Any Disadvantages to CD Laddering?

Many individuals find that there are no real disadvantages to building a CD ladder rather than taking out products individually. This should help build better rates of return (CD rate/yield calculators can be a useful way of assessing this) and better cash liquidity over time as long as the individual looks for the best rates and terms each time they make a purchase.

The copyright of the article Use a CD Laddering Strategy to Maximize Savings in Building Personal Savings is owned by Carol Finch. Permission to republish Use a CD Laddering Strategy to Maximize Savings in print or online must be granted by the author in writing.