How to Build a CD Ladder

What is a CD Ladder and how to build one…

If you want to get a little bit more out of your cash, you can make use of CDs. Certificates of Deposit (CDs) are cash products that allow you to get a fixed rate of return over a set period of time. In most cases, CDs offer a higher yield than most savings accounts, allowing you to practice capital preservation with a little more growth than you would normally see in an ordinary savings account cash product. However, CDs come with penalties when you withdraw your money early. Not only can this cut into your returns, but it can prevent you from taking advantage of increases in interest rates. Because you are locked in to a set rate, if interest rates go higher, you are stuck with a lower yield than you could be getting.

For those who want to take advantage of the higher cash yields offered by CDs, but want to minimize some of the inconveniences, a CD ladder can be of service.

Building a CD Ladder

Building a CD ladder is rather straightforward. It requires setting up a simple system to keep your CDs revolving so that you can take advantage of rising interest rates while preserving your capital and building a tidy nest egg. Say you have $8,000 saved up, and you want to find a higher yield. You also want to be able to access some of your money at regular intervals. By setting up a CD ladder, you can start a regular process that allows some access to your money, and helps you take advantage of rising interest rates.

Here’s how it works:

• You take your $8,000 to an insured financial institution (FDIC or NCUA).
• You open five different CDs for different lengths of time, putting $1,600 in each CD with terms of one, two, three, four and five years.
• Let your money grow.
• After a year, your first CD’s term will come to an end. Put the money plus interest into a new five-year CD, which will mature in year six of your plan. If you need some of the money for something, you can take some of it out at that time, before rolling it into a new CD. But you will get best results if you do take the entire amount and put it in a new CD.
• Every time a CD matures, roll it into a new five-year CD. If interest rates are rising, you will be able to take advantage of the higher yield on your new, longer-term CD. This is especially encouraging because the rates on five-year CDs are generally higher than the rates on shorter-term CDs. Once you get past the first year, all of your new CDs should be earning higher rates.

Another advantage to this system is that you will be earning compound interest. By earning interest on your previous interest earnings, your money will start to grow faster. Additionally, as each CD matures and you put the principal plus interest earned in a new CD your earnings will start to accelerate. While cash products do not offer the same growth potential as securities, you will at least have safety on your side, and this system can help your money grow almost as fast as it is likely to in cash products.

CD Ladders for Emergency Funds

You can also use this concept for emergency funds. Instead of setting up your ladder to turn over in years, set it up for months. You can open four initial CDs for three, six, nine and 12-month periods, and then renew your CDs for one-year terms when they mature. Your yield won’t be as high as when you work in years, but you can still get pretty decent yields – for an emergency fund – and know you can access your money every three months.

CD ladders can be as versatile as you need them to be. With proper planning, you can maintain your capital, and possibly even beat inflation in the bargain.

Nathan Richardson is the managing editor of ComplexSearch. ComplexSearch’s mission is to bring consumers the very best travel and tech deals daily.

Photo by splorp

CD Rates

The table below can help you get started finding a great CD rate. Select CD, your term, and the amount you have to invest and then click “Update Results”.