News & Tips
How CD Laddering Works and Benefits of this Savings Strategy
You’ve probably heard the saying, “Don’t put all your eggs in one basket.” In other words, spreading out your resources helps minimize risk while still giving you the opportunity to reap rewards. By laddering CDs, you're more or less following those words of wisdom. With a CD, you’ll earn interest at a higher rate than most savings accounts, but maybe the thought of “locking up” your money twists your stomach into a knot. CD laddering involves opening multiple CDs with staggered maturities. Let’s break down CD ladders so you can divide and conquer!
What is a CD (Certificate of Deposit)?
A CD, or a certificate of deposit, is a type of savings account where your money accrues interest at a fixed rate during a specific timeframe, or term. The end date for that fixed term is called the CD’s “maturity date.” Most CDs will have a minimum deposit requirement. Usually, the longer the CD term, the higher the interest rate. If you withdraw your funds before the CD’s maturity date, the financial institution will charge an early withdrawal penalty.
What is a CD Ladder?
A CD ladder involves dividing a lump sum of money, usually evenly but not always, into CDs of varying term lengths (“rungs”). Once each of those CDs matures (end of the term), you have the option to cash out or re-invest the funds into a CD with a longer term—traditionally the longest CD term in your ladder. CD laddering gives you regular access to your funds while you still earn interest on longer-term CDs: the best of both worlds!
How to Build a CD Ladder
Let’s break down how CD laddering works step by step:
Step 1: Decide how much money you’d like to invest in multiple CDs to create your CD ladder.
Let’s say you have $5,000 in a savings account that has a low interest rate, and you’d like your money to, well, earn you more money. (On a side note, opening a CD with your emergency savings isn’t a good idea because you’d have to pay a fee if you needed to make an early withdrawal.)
Step 2: Consider your CD terms to build your ladder.
What’s the maximum amount of time you’re okay with “locking up” your funds? Usually, the minimum CD term is 3 months, and the maximum is 10 years. You might feel like Goldilocks with this step. If you choose a term that’s too short with a low interest rate, you won’t be earning much money, but if you’d like to access your funds in the near future, you may want to avoid a term that’s too long.
Step 3: Shop around for the best CD rates.
Look at banks and credit unions both online and locally to find the best CD rates possible for your savings. For more of an apples-to-apples comparison, be sure to check the CD’s APY (annual percentage yield), which is the total interest your account earns over a year. If you’d like, you can open CDs at more than one financial institution when building your ladder. Most CD rates will be higher for longer terms, but you may come across good rates for short-to-medium terms, too.
At Space Coast Credit Union (SCCU), we offer a large CD term selection, and you can open a CD for as little as $500.6
| Term | Interest Rate | APY^ | Min. Average Daily Balance to Earn APY^ |
|---|---|---|---|
| 3 Months | 4.18% | 4.25% | $500 |
| 6 Months | 4.11% | 4.15% | $500 |
| 9 Months | 3.94% | 4.00% | $500 |
| 12 Months | 3.80% | 3.85% | $500 |
| 18 Months | 3.41% | 3.45% | $500 |
| 24 Months | 3.31% | 3.35% | $500 |
| 30 Months | 3.26% | 3.30% | $500 |
| 36 Months | 3.21% | 3.25% | $500 |
| 42 Months | 3.21% | 3.25% | $500 |
| 48 Months | 3.21% | 3.25% | $500 |
| 54 Months | 3.21% | 3.25% | $500 |
| 60 Months | 3.36% | 3.40% | $500 |
CD Account rates are accurate as of the date indicated and are subject to change at any time. The minimum deposit required is $500 for all terms. The minimum average daily balance to earn APY (Annual Percentage Yield) is $500. The APY is based on the assumption that interest will remain in the CD Account until maturity. A penalty may be assessed for early withdrawal. Fees may reduce the earnings on the CD Account.
Step 4: Split your funds evenly or unevenly.
In most cases, CD ladders involve evenly portioning your funds, but it’s not a requirement. Let’s say you decide to divide your $5,000 evenly into five CDs at different terms at SCCU. In this case, you choose each term to be 12 months apart. (Note: Rates below are current as of 02/15/23; rates subject to change at any time. If you’re planning to invest in CDs, check current CD rates here.)- 12-month CD: $1,000 at 3.29% APY^
- 24-month CD: $1,000 at 3.80% APY^
- 36-month CD: $1,000 at 3.55% APY^
- 48-month CD: $1,000 at 3.55% APY^
- 60-month CD: $1,000 at 3.55% APY^
Step 5: Choose to cash out or re-invest funds.
You can continue to build the ladder by re-investing all or some of the funds into a new CD of the term of your choosing, cash out, or let the CD automatically renew with the same term (the rate may be different). If you choose the traditional route with the example above, you’d re-invest each CD’s funds into a 60-month CD.With this CD calculator, feel free to have some fun plugging in different deposit amounts, rates, and terms to help you see what you’ll earn at the end of a CD’s term.
CD Ladder Example
Here’s how the example above would look in a timeline format if you chose to re-invest both the initial deposit and earned interest for each CD into a 60-month CD (interest compounded quarterly):
How much can you make with a CD Ladder?
With the example above, your total interest earnings would be $1,618.89 ($6,618.89 total amount with initial deposits). Ultimately, the amount of money you can make by laddering CDs depends on your initial deposit amounts, the CD terms, and interest rates. All in all, you could end up making a good chunk of change—typically much more than you would with a Money Market savings account.
Mini CD Ladder
It doesn’t have to be “go big or go home” with CDs. You also have the option of taking baby steps with a mini CD ladder—opening multiple short-term CDs. For example, you could open a 3-month CD, a 6-month CD, and a 9-month CD and then re-investing each of those again into a 9-month CD. You’d then have access to your funds every 3 months for 18 months.
Benefits of CD Laddering
Laddering CDs offers a plethora of rewarding benefits:
- Flexibility: You’re the captain of your CD laddering strategy—you can choose how to divide up your funds (evenly or unevenly), which CD terms you’d like, and whether you’d like to cash out or re-invest the funds upon maturation. You could even choose to divide your funds into CDs at different financial institutions.
- Safe investment strategy: CDs offer guaranteed interest rates and returns (as long as they’re insured by the FDIC or the NCUA).
- Cash flow access: You’ll be able to withdraw your funds, if you so choose, at regular intervals.
- Rising rate advantage: If rates rise, you’ll be able to re-invest your short-term CDs into CDs with higher rates.
Drawbacks of CD Laddering
It’s a good idea to be aware of the potential downsides of CD laddering:
- Declining rates: CD rates could also go down, and if you’d like to re-invest your CD’s funds into a new CD upon maturation, your choices may not be as good, which means your potential earnings won’t be as good as they would have before when rates were better.
- Inflation: CD rates generally can’t keep up with the pace of inflation, so your CD’s final value may not have as much purchasing power upon maturation.
- Staggered maturation dates: You may need to mark your calendar to help you keep track of every CD’s maturation date. With most financial institutions, you’ll have a grace period for withdrawing your CD’s funds (usually 7-10 days) before it renews automatically at the same term (at that bank or credit union’s current rate for that term). If you miss the maturity date and the CD automatically renews, you will most likely incur penalties if you try to withdraw funds before the new maturity date.
- Early withdrawal penalties: Withdrawing the money from your CD prematurely will most likely come with a penalty fee.
Are CD Ladders Worth It?
CD ladders are worth it if you’d like the guarantee that your savings will earn more money while still having the peace of mind that your funds are accessible at regular intervals. Plus, CDs offer more flexibility because you call the shots with your deposit amounts, CD terms, and re-investment amounts. Keep in mind, you’d likely earn more from depositing more funds into long-term CDs.
If you’d like to save more money for a house, a car, or a milestone celebration in the short- to medium-term future, CD laddering may be a good option for you.
Alternatives to CDs
On the flip side, depending on your financial goals and financial flexibility, here are some alternative savings avenues to regular CDs:
- Retirement: If you’re saving for your nest egg, consider 401(k)s and IRAs (also IRA CDs). These accounts are specifically for growing your savings for retirement.
- Investments: If you’d like to grow your wealth, and you’re okay with the risks involved, then it’s a good idea to meet with a financial advisor to discuss investing your funds in stocks, bonds, and mutual funds.
- Other Savings Accounts: Be sure to check out high-yield savings accounts if you’d like to have 24/7 cash access. At SCCU, we offer Saving Cents, which is a round-up savings account that earns interest. If you’d like to save more when it’s time to buy gifts during the holidays, check out a Christmas Club account.
How to Open CDs at SCCU
It’s easy to open a CD with an online application at SCCU. With just a few simple clicks, you could open multiple CDs and earn money even while you sleep! If you’re not already a member of SCCU, you can become one as long as you live or work in these counties in Florida and deposit $5 in a Share Savings account. If you have any questions or concerns, feel free to fill out this form or reach out to us.
^APY = Annual Percentage Yield