How a CD Ladder Can Maximize Your Money
Benilyn has over a decade of experience as a banking officer. Her expertise is featured throughout Fit Small Business in personal finance, credit card, and real estate investing content.
This article is part of a larger series on Business Banking.
A certificate of deposit (CD) offers premium rates. However, you cannot access your funds until maturity. If you want to take advantage of the higher rates CDs offer but don’t want to commit all your money to one long-term CD, you can use a CD ladder to help maximize your money and make your funds available more frequently.
What Is a CD Ladder?
A CD ladder is a savings strategy where business owners invest funds in multiple certificates of deposit with different maturity dates. This strategy allows you to take advantage of the long-term CD’s higher rates while the short-term CDs give you frequent access to your funds. The CD ladder’s staggered maturity dates provide better interest income and available cash. In general, a CD ladder is intended to maximize your returns and ease up your business’s cash flow.
How a CD Ladder Works
A CD ladder works by having multiple CDs with different maturity dates. As each CD matures, you can either withdraw your money, make a partial withdrawal, or roll the funds into a new CD. Having multiple CDs with varying terms gives you the ability to plan ahead with your business funds while taking advantage of the CD rates. You’ll also have the flexibility to choose the CD terms you want to include in your portfolio.
You have the option to open all your CDs with the same bank or open multiple CDs with different banks. Having CD accounts with multiple banks provides more security because each account will be covered by Federal Deposit Insurance Corporation (FDIC) insurance. You can also take advantage of the best rates provided by different institutions. Meanwhile, maintaining all your CDs in one bank makes it easier to manage them.
CD Ladder Example
For example, if you want to create a CD ladder that includes five CDs that mature at one year, two years, three years, four years, and five years, and you have $5,000 to invest, you can divide the funds equally into five CDs with different terms and corresponding annual percentage yields (APYs), as follows:
Principal Amount | Term | APY |
|---|---|---|
$1,000 | 1 year | 0.80% |
$1,000 | 2 year | 0.90% |
$1,000 | 3 year | 1.00% |
$1,000 | 4 year | 1.10% |
$1,000 | 5 year | 1.25% |
When the first CD matures after one year, you can choose to withdraw your funds or redeposit them into another CD with a five-year term. The other CDs that you opened will be one year closer to their maturity date. Every year, you will have a maturing CD, making your money available in case you need it. You can continue this process each year if you want to keep your CD ladder.
It’s important to note that CDs in a CD ladder can either have the same amount or different amounts of money in each account. You don’t have to open all your CDs in the same bank. It’s best to shop around for the best rates on each CD term, as rates can vary from bank to bank.
How to Build a CD Ladder
The process of building a CD ladder is quite simple—you only need to open several CD accounts with different terms. Once the account with the shortest term matures, you can either withdraw your funds or open a new longer-term CD account with a higher interest rate. It’s important to plan ahead with your business finances to ensure that your money will be available when you need it.
To build a CD ladder, follow these steps.
1. Identify How Much You Want to Save
The first step is to find out how much you are willing to save in certificates of deposit. You have to remember that, unlike money deposited to a business savings or checking account, the money you save in a CD is not withdrawable until the term ends. When deciding how much to save, you have to consider your business finances carefully and make sure to only save what you won’t need to spend any time soon.
2. Decide How Many CDs You Want to Open
After identifying the amount of money you want to save, you should then decide how many CDs you want to open. It’s essential to only open as many CD accounts as you can comfortably keep track of. Most business owners divide their funds into equal amounts across multiple CDs. However, you can choose to have different CD amounts with different terms.
3. Determine How Often You Want Your CDs to Mature
Most banks offer a variety of CD terms—from as short as three months to as long as 10 years. When building a CD ladder, you have to choose CD terms that are convenient to your business plans. If you want to be able to access your CD funds every six months, choose CDs with six-month, 12-month, 18-month, and 24-month terms. You can also choose CDs that mature on a yearly basis. Make sure to find the best rates for the terms that you choose.
4. Open Your Initial CDs
Once you have decided the amount to save, the number of CDs to open, and your preferred terms, it’s time to shop around for banks that offer the best rates. You can open all your CDs in one bank or use different banks depending on which one offers the best rates. You need to open all CDs in your CD ladder at the same time and keep track of their maturity dates.
5. Reinvest Your Matured CDs
When the CD account with the shortest term matures, you can withdraw the money from the investment if necessary or reinvest it in a new CD with your longest preferred term. You can do this same process for the other CDs that will mature. Every time you roll over a matured CD, you’ll build upon your initial ladder but maintain regular maturity intervals.
Pros & Cons of a CD Ladder
| PROS | CONS |
|---|---|
| CDs offer a guaranteed interest rate, which means your rates are locked in until your term ends, despite the fluctuation. | Interest rates can fluctuate—and when the rates decline, you might be reinvesting the ladder into lower rates when a CD matures. |
| A CD ladder offers more liquidity because you maintain regular maturity intervals. | Rates may not keep up with inflation. |
| You can earn higher interest rates by the time you have cycled through all your CDs. | You still need to wait until a CD matures before you can withdraw your funds. Early withdrawal or pre-termination of the account is subject to penalties. |
Bottom Line
A CD ladder is a great strategy for minimizing the risk of interest rate fluctuations and ensuring fixed interest earnings. A CD ladder allows you to take advantage of CD rates without totally giving up liquidity because you will have access to your accounts at frequent intervals. Consider using a CD ladder for short- to medium-term goals. However, it’s important to remember that a certificate of deposit should not be intended as an emergency savings account.
