What is a CD Ladder and should you have one?

One of our primary missions as a supercommunity bank is to help you achieve your financial goals. Nothing makes us happier than seeing our customers level up their lives with growing businesses, newly constructed dream homes, and a comfortable retirement plan.  

Part of those retirement goals may include using Certificates of Deposit to safely stash money away for years while it earns interest. We know you work hard for your money, and we’re here to help you make sure your money continues working for you. 

Today we’re talking about CD ladders. Specifically, what they are and where they might fit into your financial strategy, so you can decide if it’s the right step for you. 

First of all, what is a CD?

Think of a CD as a savings account with some specific rules. 

When you put money into a regular savings account, you don't do it solely for the purpose of getting a return. The interest is a nice benefit, but you also have the flexibility to tap into that fund for a big purchase, vacation or emergency. 
Putting your money into a CD is different. The money is invested for a set term at a fixed interest rate. Like a savings account, the return depends on current interest rates. But if you’re looking for a low risk, predictable growth account, CD’s do the job well. 

Unlike the savings account, a CD locks your money in for the term you set. The longer the term, the higher the interest rate you generally earn. Choose a term length you are comfortable with, because if you do need to withdraw the money before the CD matures, you will pay a penalty. 

Bonus: CDs are insured by the federal government too, so you can rest easy knowing your money is protected.*

How does a CD ladder work? 

The thought of locking away your money for years can feel daunting. What happens if an emergency comes up and you need to withdraw some of it? On top of losing part of your investment, you’ll have the penalties to pay. 
A CD ladder helps you mitigate those risks by allowing you to split your money into different term lengths. 

Say you have $15,000 to invest. Instead of dumping all $15,000 into a single 5-year high-interest CD, you start by splitting the money into 5 equal parts and investing in CD’s of different terms. 

$3,000 into a 6-month CD
$3,000 into a 1-year CD
$3,000 into an 18-month CD
$3,000 into a 2-year CD
$3,000 into a 3-year CD

When the first matures, you can reinvest the original $3,000 plus the acquired interest into a 5-year high-interest CD. As the remaining CD’s mature, you can do the same. 

After those first 5 years, assuming you didn’t take anything out of your CD ladder, you'll have 5 year term CDs maturing every year - getting the highest possible rate and making the most on your initial $15,000.

Of course, if the need arises, you can close out one of your CD’s after it matures and then refill that slot with another CD later. The CD ladder gives you a great way to continually earn high interest while giving you more flexibility in withdrawing money without penalties. 

So, should you set up a CD ladder?

If you have money sitting in a savings account that you’d like to keep saved – and working harder for you – over the next few years, a CD ladder is a safe and sound option. And while it may take a bit more time to set up, it’s a worthwhile investment strategy that results in higher returns than a run-of-the-mill savings account. 

For assistance in setting up your CD ladder, contact a Starion Bank personal banker or stop in to any one of our conveniently located branch offices

* FDIC deposit insurance limitations apply. Please contact Starion Bank for additional information.