CD Ladders - Maximizing Yield without Locking Up Funds

What is CD Laddering?

CD Laddering is a savings strategy designed to maximize interest earned while providing access to CD funds on a regular basis.

Here’s how it works

Let’s say you have $50,000 to invest. Rather than investing the entire amount in a single CD, you start a CD “ladder.”

Here’s how you begin. The $50,000 can be deposited into five CDs for $10,000 a piece—with maturity dates spanning one to five years. Using this approach, one CD matures in one year, another in two years, another in three years, and so forth. In other words, for the next five years, one of your CDs will mature every year.

If you want more liquidity, simply purchase ten CDs with maturity dates every 6 months for the next 5 years. This way you would have funds coming due every six months.

Repeating the process

When the first CD matures, you use the principal (the original $10,000) to buy a new five-year CD. As each CD matures, you repeat the process, renewing each CD for a five-year term. The key to laddering is to use the same five-year term for each renewal, so that the maturity intervals stay the same.

Rate advantages

Why five year CDs for the renewing CDs? Typically, five-year CDs offer the highest rate available. So whenever you purchase a CD, you are securing the highest interest rate.

CD Ladder Example

Below is an example of a CD Ladder where there is a CD coming due every 6 months.

CD Specials

At many banks, the best CD rates are typically on their CD Specials. To maximize your earnings, you want to be sure to include these CD specials in your CD Ladder. Below is an example of how you can use regular CDs along with CD Specials to improve your CD interest. If you notice, by adding the CD specials, the overall yield on the CD Ladder increased from 3.63% to 3.89%.