The interest rates offered on traditional savings accounts and money market accounts often feel underwhelming for savers. While exact rates fluctuate over time, these accounts typically offer modest returns because they prioritize safety and liquidity over growth.
Fortunately, consumers have other low-risk options if they want to earn more interest on their savings without taking on market risk. One common alternative is a certificate of deposit (CD), also known as a Certificate Account at credit unions. CDs generally offer higher interest rates than standard savings accounts, but they come with a tradeoff. You agree to leave your money untouched for a fixed period, known as a term. If you withdraw funds before the CD matures, you will usually pay an early withdrawal penalty.
CD terms can vary widely. Financial institutions offer short-term options of 3, 6, or 9 months, which may work well for short-term savings needs. Longer terms can extend to five years or more. In most cases, the longer the term, the higher the interest rate offered, rewarding savers for committing their money for a longer period.
But what if you want the higher interest rates that CDs offer while still maintaining easier access to your cash? That balance can be achieved through a strategy known as CD laddering.
How Laddering Works
CD laddering involves dividing your savings across multiple CDs with different maturity dates. The goal is to structure the CDs so that one matures at regular intervals, such as once per year. Each time a CD matures, you can decide whether to withdraw the funds, reinvest them, or do a combination of both.
This approach provides regular access to your money without penalties, while allowing the remaining funds to continue earning higher interest.
Example of a CD Ladder
You might start by opening CDs with terms of 12, 24, 36, 48, and 60 months. The longest CD typically earns the highest interest rate. After one year, the 12-month CD matures. At that point, you can withdraw any funds you need and reinvest the remaining balance into a new, longer-term CD.
The following year, the 24-month CD matures. Again, you can withdraw, renew, or partially reinvest the funds. This process continues each year, ensuring that a portion of your savings becomes available on a predictable schedule.
You can also build a ladder with shorter terms. For example, CDs with six-, nine-, and twelve-month terms can be laddered and renewed as they mature. The structure can be adjusted to your goals, timeline, and cash flow needs.
Risks and Considerations
When used consistently, CD laddering carries relatively low risk, but it does require discipline. Withdrawing all funds from a maturing CD instead of reinvesting can disrupt the ladder and create gaps in future access.
It is also important to recognize that CDs are not designed to generate the highest possible returns. While they typically offer better interest rates than standard savings accounts, they usually earn less than higher-risk investments such as stocks or certain bond funds. CD laddering is best viewed as a strategy for stability and steady growth rather than rapid wealth building.
Changes in interest rates over time can also affect how attractive new CD rates are when your CDs mature. Laddering helps manage this risk by spreading your investments across multiple terms rather than locking everything into a single term.
Who CD Laddering Is Best For
CD laddering works well for savers who value safety, predictable returns, and regular access to a portion of their cash. It is especially useful for people building emergency savings, planning for known future expenses, or seeking an alternative to leaving large balances in low-yield savings accounts.
For those willing to accept more risk in exchange for higher potential returns, other investment options may be more appropriate. However, for conservative savers, CD laddering offers a practical way to earn more interest while maintaining flexibility.
Final Thought
CD laddering is a straightforward strategy that combines the higher interest rates of longer-term CDs with the accessibility of staggered maturity dates. While it is not a high-growth investment approach, it can be an effective way to grow savings safely and steadily. By structuring CDs thoughtfully and reinvesting consistently, savers can make their cash work harder without sacrificing security or liquidity.