A CD laddering strategy can be a smart choice if you want to take advantage of CD interest rates while still enjoying regular access to your money.
What is CD laddering?
The way CDs work is pretty simple: The longer you keep funds in the bank, the higher the interest rate. Essentially, you’re rewarded for committing to a longer length of time. The tradeoff is you’re unable to access those funds for anywhere from 3 months to 5 years, depending on the term you chose. That’s where CD laddering comes into play.
With CD laddering, instead of opening one large CD, you can open CDs with lesser balances and stagger the terms, meaning they’ll mature at varying dates.
For example, let's say you have $6,000 to deposit and your goal is to have that $6,000 plus interest at the end of 3 years. Instead of locking it into a 36-month, you want an option that will give you a little more flexibility to access the money if needed. One option is to open one fixed-term CD with the entire $6,000 that matures every 12 months and rolling it over to another 12-month CD as it matures, until the end of the 36 months.
Another option you may want to consider is this CD laddering strategy:
- Put $2,000 in a 12-month CD
- Put $2,000 in a 24-month CD
- Put $2,000 in a 36-month CD
See the quick illustration below: