What is a CD Ladder (Laddering)?

CD (Certificate of Deposit) laddering is the idea of buying multiple CD’s at once with different maturity dates. For example, with $10,000, one could purchase 5 CD’s – one CD maturing once a year for the next 5 years. Each CD is essentially one run of the ladder, or to put in other words, each rung of the ladder represents 1 year.

Each successive year will always have a higher yield if all CD’s are purchased at once. If you’re patient enough, you can a higher yield by buying CD’s from 5 different banks since one bank with the highest 1 year CD yield may not offer as good of a deal other CD terms. Make sure that each CD you purchase is FDIC insured.

These 5 CD’s, or 5 years, represents 5 rungs of the ladder. Laddering is the idea of taking each successive maturing CD and reinvesting into another CD. To illustrate this idea – after 1 year, the first matured CD would be reinvested into a 5 year CD if rates are high, and perhaps a 1 or 2 year CD if rates seem a little low. This reinvestment represents the 6th rung of the ladder. After the second CD matures in year 2, this reinvestment represents the 7th rung of the ladder.

Benefits of CD (Certificate of Deposit) Laddering:

Provides Cash Flow – Each CD that matures offers the investor cash without having to pay penalty fees of an early withdrawal from a locked CD.

FDIC Insured – Unlike most other investments, a CD (Certificate of Deposit) is guaranteed by the FDIC. To this day, not a single penny has been lost from an FDIC insured account or investment.

Guaranteed Returns – Due to the fact that CDs are FDIC insured, the investor has a guaranteed return. CD laddering is particularly attractive today when markets are so volatile and unpredictable.

Investment Flexibility – CD laddering is an investment strategy that offers security AND flexibility. When each successive CD matures, not only is an investor given an opportunity to decide the length of term for the new CD (shorter term if rates are projected to rise, longer term if rates are projected to fall), the investor also has the opportunity to cash out and place the balance in a fully liquid account such as a high yield savings account or a high yield money market account.  The flexibility of CD laddering not only gives the investor more options, but also greater control in higher returns.

These benefits of cash flow, FDIC insurance, guaranteed returns, and investment flexibility make CD laddering a great investment strategy.

Tags: Benefits of CD Laddering, CD Ladder Definition, Certificate of Deposit, What is a CD Ladder

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