What is a CD Ladder and How to Build One
CDs typically offer higher interest rates than traditional savings accounts. See how you can make the most of those higher rates with CD laddering.
Interest rates are currently some of the highest they’ve been in years. It’s not ideal if you’re looking to take out a loan, but one of the positive side effects is that you could be earning more on your savings.
CD savings accounts typically offer higher interest rates than traditional savings accounts, so you could make the most of those higher rates this year with CD laddering.
What is a CD?
A
certificate of deposit is an FDIC-insured savings account where you can deposit a set amount of money for a fixed amount of time. By opening an account, you agree not to withdraw that money until the account maturity date.
In exchange for your money being locked away for this time period, you’ll benefit from a higher interest rate than other savings accounts that give you more accessibility to those funds.
When opening a CD, you usually get a choice of term, so you can find something that works best for you. In most cases, the longer the term length (the amount of time your money is locked away for), the higher the interest rate will be.
At First National Bank and Trust, you can open a high-interest CD anywhere from 3 months to 5 years. There’s generally no maintenance required once you open a CD, but there can be penalties if you withdraw your cash early.
Why Open a CD?
There are plenty of reasons to open a CD, but one of the best reasons is to earn more interest on the money you already have saved. If you don’t need to touch that money right away, you can keep these funds in a CD for a long time and benefit from additional earnings through high interest.
You may have some money that you’ve set aside for a specific reason, like buying a house or a big vacation you want to take. If you know when you need that money, you can put this cash into a CD for a term limit that matches your plans. That way, you’re earning more interest while waiting for that date to arrive, and once the CD matures, you can access the cash again.
What is a CD Ladder?
A CD ladder is a financial strategy where you can keep different amounts of money accessible while still taking advantage of the high-interest rates that CDs offer.
Putting different lump sums into multiple CDs with different term lengths, makes your money accessible again at different intervals. These CDs will likely have different interest rates that correlate with their term lengths.
Instead of putting all your money into a single CD with a long term, you can split those funds and have access to at least some of your money in a shorter amount of time, while still accounting for long term growth.
When you’re laddering CDs, you can re-invest the money from matured CDs into a new CD account, helping to maintain the momentum you’ve started to build. With a fixed interest rate on each CD, your money can grow steadily and reliably, regardless of the wider economy.
How to Build a CD Ladder
The first step is to open your initial CD accounts and spread out your investment across multiple CDs. For instance, a $5,000 investment could look like:
- $1,000 in a 1 year CD
- $1,000 in a 2 year CD
- $1,000 in a 3 year CD
- $1,000 in a 4 year CD
- $1,000 in a 5 year CD
You may want to put more money into CDs with higher interest rates, but you’ll need to be aware of the maturity dates and not have access to this money for that fixed period.
Once your CDs each reach their maturity dates, you can reinvest this money into a new CD. If you move this money into a 5-year CD and do the same with each subsequent matured CD amount, your CD ladder will then have numerous 5-year CDs, with one maturing each year because you’ve staggered them.
Benefits of CD Laddering
With CD laddering, you can decide exactly how you want to split your money, what terms you want to work with, and what your individual deposit amounts will be. You can also have more access to your funds when you ladder your CDs, as each will mature at different intervals. You can then choose to reinvest in a CD or look at other higher-interest savings options.
You’ll typically earn more interest on a CD than you would with a traditional savings account. So, the more you invest, the more interest you’ll earn.
You can also benefit from different interest rates as your policies mature and you start new accounts. For instance, if all your funds are in one CD and rates go up, you could be missing out because everything is already locked away in a single account. With laddering, you can take advantage of these increasing rates as your accounts mature.
CDs are also insured accounts, which means you’re covered by
FDIC deposit insurance up to the insured amount.
Things to Consider Before Building a CD Ladder
One of the most important things to think about before starting a CD ladder is your financial liquidity. Once you’ve opened a CD, you won’t be able to withdraw this money during the term of the account without a penalty. Be sure you have some money set aside in case of an emergency.
You may need the cash when one of your CDs matures, which can disrupt your entire CD ladder. Think about other savings you can put aside to keep your ladder going, while also preparing for possible financial emergencies.
Look at interest rates when you’re thinking about reinvesting. Inflation may outpace your CD rates, while falling interest rates could mean that you’re not getting as high a return when you open a new CD. Determine whether the new rate is higher than current savings rates and if it’s worth reinvesting that money in another CD.
If another CD isn’t the best option, you may want to keep some money free if rates are going up in other areas. Money market accounts or other
investments like
stocks and bonds* may be a better option if you need more access to your money.
What is a Brokered CD?*
At First National Bank and Trust, we offer an option of
brokered CDs* through our wealth management division.
You’ll have access to potentially higher interest rates, with more options for taking your money out without penalties. There are some risks with the longer-term options, like 20-year CD accounts, but your wealth manager can talk to you about the risks and benefits you could be looking at with a brokered account.
Build Your CD Ladder Today
If you’re ready to create a CD ladder, First National Bank and Trust can help you determine the best strategy based on your deposit amount and current interest rates.
Contact us today to learn more about CD terms or visit one of our
convenient locations to speak to the investments and savings team. We have several branches throughout Southern Wisconsin and Northern Illinois including Beloit, Argyle, Clinton, Darien, Delavan, Elkhorn, Janesville, Monroe, Rockton, Roscoe, Williams Bay, Walworth, and Winnebago.
* Check the background of our investment professionals on FINRA's BrokerCheck.
Securities and insurance products are offered through Cetera Investment Services LLC (doing insurance business in CA as CFG STC Insurance Agency LLC), member FINRA/SIPC. Advisory services are offered through Cetera Investment Advisers LLC. Neither firm is affiliated with the financial institution where investment services are offered. Investments are:
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