Whether you want to save for retirement or a major purchase, there are many effective saving strategies you can implement to increase your savings and build your wealth over time. One such strategy is the CD ladder saving strategy, which gives you the opportunity to invest in certificates of deposit that offer relatively high interest rates over a lengthy period of time. This guide tells you all you need to know about the CD ladder saving strategy and how it can be applied to your portfolio.

CD Ladder Saving Strategy

What Is a Certificate of Deposit?

A certificate of deposit is a kind of savings product that comes with higher interest rates when compared to standard savings accounts. These products also have fixed maturity dates. The majority of CDs have been insured by the FDIC, which means that your money will be protected. 

The main issue with this solution is that your funds will be locked in for a specific period of time. In most cases, the funds are unable to be withdrawn before the maturity date. If you remove funds from the account before it matures, you’ll need to pay a sizable penalty. 

What Is a CD Ladder?

A CD ladder is an effective savings strategy that involves spreading a lump sum of your money throughout multiple certificates of deposit that have differing maturity dates. The goal of this strategy is to obtain and lock in relatively high APYs in multiple CDs as opposed to doing so in a single CD. Since the certificates of maturity will reach their maturity dates at different times, your cash will be freed up. You can then use this cash or place it into new CD accounts. 

Benefits of a CD Ladder

In the event that you place all of your funds into one CD, this money will be locked in the account until the CD matures. The only way to get around this issue is by paying an early withdrawal penalty. CD laddering is designed to mitigate this issue by spreading your funds across numerous CDs for added flexibility. Whenever one of your CDs matures, you’ll receive funds that you can now use for practically anything. 

This saving strategy is also effective because of how CD rates fluctuate. Even though CD accounts come with fixed rates, using the laddering strategy allows you to take any rate shifts into account. Another benefit of this strategy is that you can take advantage of the higher rates that typically come with long-term CDs without needing to place all of your money into that specific CD.

How to Build a CD Ladder Saving Strategy

Begin this strategy by identifying the amount of money you’d like to save in certificates of deposit. Make sure that you’re comfortable with how much money will be put away. While you’ll eventually gain access to these funds, you shouldn’t put yourself in financial strain by saving too much.

Identify how often you want your CD accounts to mature and the number of CD’s you’d like to open. There are a few ways that a CD ladder can be structured. For instance, you can create a ladder with five CDs that mature annually but at different dates. If you want your CD accounts to mature more frequently, additional CDs will be needed. This ladder can be designed in any way you see fit. 

Now it’s time to build the CD ladder. After you’ve identified how much money you’d like to save and the number of CDs you wish to open, you can begin to open these accounts. Make sure that the CD terms are staggered on a rolling basis. 

From here, you can continue laddering if this strategy pays off. After your initial CD matures, the funds you gain can be used with a CD that has a lengthier term, which means that it will be placed at the very top of your ladder. In the event that you need some cash, these funds can be withdrawn directly to your bank account following the maturity date. 

CD laddering allows you to develop a consist investment return while also helping you earn higher returns than you would receive with just one short-term CD. This type of saving strategy is best used to reach short-term savings goals.