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What is CD Laddering?


Certificates of Deposit (CDs) are popular investment products because they offer consistent returns with little to no risk.

As with any account that accumulates interest or dividends, investors typically get better returns from longer terms, but those higher rates come at the cost of not being able to access funds until the term is up. To circumvent that limitation, some investors open multiple CDs of varying lengths. By structuring their CDs in this way (a process called “CD laddering”) investors reap the benefits of higher-interest rates on their longer-term CDs while enjoying access to some of their funds earlier as their shorter CDs come to term.

CDs are typically offered by banks, but credit unions use a similar financial product: share certificates. While there are small differences between the two (for example, both are insured up to the same $250,000 limit, but CDs are typically insured by the FDIC while share certificates are insured by the NCUA), the laddering strategy works the same for both products.

By laddering CDs and/or share certificates, you can maximize your return over time while enjoying higher liquidity than a traditional CD. This guide explains the ins and outs of building a CD ladder, what makes them worthwhile, and some potential drawbacks of CD laddering.

To take the next financial planning step, build your share certificate ladder with AFCU.

How to Build a CD Ladder

There is no hard and fast rule about the number of “rungs” (or separate CDs) your CD ladder should include. There are some practical considerations that you should keep in mind to build a CD ladder that meets your needs:

  • Funds Access. Laddered CDs, just like normal CDs, earn a set rate over their term, but that high rate comes at a price: flexibility. Investors can’t access funds in a CD until the term is up, so when structuring the rungs of your CD ladder, keep in mind how soon you may need access to those funds. Ultimately, the minimum CD term depends on your financial institution, but some investors structure their CD ladder with terms for as short as a few months or as long as a decade or more.
  • Return on Investment. A longer CD term gives your account more time to mature and accrue interest, and banks typically offer better interest rates on medium- to long-term CDs than on their short-term counterparts. In other words, shorter-term lengths give you earlier access to funds, but longer-term lengths typically give you greater earnings. Laddering CDs help investors combine both strengths, but only if you balance your need for funds access against your need for a high return on investment.
  • Administrative Complexity. More rungs in your CD ladder means more flexibility, but it also means more administrative complexity. While your financial institution may handle the day-to-day work of managing your investments, a large number of rungs in your CD ladder can quickly become difficult to keep track of.

With these considerations in mind, most investors build a CD ladder with 5 rungs, typically with a maximum term of 5 years. Remember that you can reinvest funds by renewing your CDs, so a 5-year term balances the higher interest rate of a medium-term CD with relatively low commitment. However, most financial institutions offer CDs with terms lengths of 10 years or longer, if that’s more your style.

Once you’ve determined the length of your longest CD term, you can structure your remaining CDs either evenly (ex. 1-year, 2-year, 3-year, 4-year, and 5-year CDs) or unevenly (ex. 3-month, 9-month, 18-month, 3-year, and 5-year CDs).

Are CD Ladders Worth It?

If one type of investment product was “the best,” everybody would use it. In reality, whether CD ladders are worthwhile to you or not depends on your financial situation, your risk tolerance, and your plans for the future.

Advantages of CD Ladders

The biggest advantage of laddered CDs is that they combine the high-interest rates of long-term CDs with access to short-term CD funds.

CD ladders are also more flexible than other types of investments. That’s because you can decide to reinvest your funds as each CD matures if you aren’t ready to make a withdrawal. In other words, you have the opportunity to access funds when your term is up if you need them (without paying early withdrawal penalties) but can continue accruing interest for as long as possible.

Another advantage of CDs, in general, is that they don’t rely on market performance. While IRAs and savings account rates fluctuate based on the market, CDs offer a fixed consistent return for their entire term. However, CD rates fluctuate based on market conditions as financial institutions adjust their rates to reflect liquidity, but once you lock in your CD rate, you’ll keep that rate for the entire term.

Disadvantages of CD Ladders

As you consider CD ladders, keep in mind that you should weigh the benefits of laddered CDs not only against traditional CDs but also against other types of financial products.

For example, while laddered CDs have more flexibility than a traditional CD, they still have less flexibility than a savings or brokerage account (but with the added benefit of decreased risk).

Another disadvantage of CD ladders is incorporating shorter-term lengths, you miss out on the higher rates that you could get from a single long-term CD.

While CD ladders completely avoid the lowest lows of extraordinary risks, they equally eschew the highest highs of extraordinary returns. For some investors, that safety is an advantage, but for risk-tolerant investors, it could represent a missed opportunity for a more aggressive investment.

Start Share Certificate Laddering Today

Just like CD laddering, share certificate laddering allows you to earn higher rates while providing more frequent access to funds. As a credit union, Arkansas Federal Credit Union offers share certificates rather than CDs, but the philosophy and strategy remain the same.

CD and share certificate laddering are powerful ways to enhance your portfolio with reliable returns with multiple terms to choose from.

To learn more about opening your laddered share certificates, contact Arkansas Federal to get started today.

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