CD Ladder Strategy: How to Ladder a CD Portfolio

A CD ladder is an investing technique whereby you can divide the amount of money you want to invest into equal amounts. You then invest these funds into certificates of deposit, each with different maturity dates.

Creating a CD ladder can be a great way to combine the highest CD rates of a long term certificate of deposit with the liquidity of shorter term CDs. Those seeking good interest rates without having to lock up principal for long periods of time should consider using the CD laddering strategy.

How Does Laddering Certificates of Deposit Work?

You can build a CD ladder by investing equal amounts of cash into CDs with different maturity terms. For example, if you have $10,000 to invest, you could invest $2,000 into a one year certificate of deposit, and $2,000 into CDs with stepped-up maturity terms through to a 5 year certificate of deposit. Typically, you will get the highest certificate of deposit rates with the five year CD.

When your one year certificate of deposit matures, you can take those funds and reinvest them into another 5 year certificate of deposit. Each year, as the next CD comes due, continue to purchase CDs with longer terms and thus, higher interest rates. Eventually, you will have all longer term CDs in your ladder that are producing higher interest rates, yet you will still have CDs coming due each year and providing you with liquidity should you need it.

What are the Primary Benefits of CD Ladders

Laddering certificates of deposit helps to decrease both interest rate risk and re-investment risk. If you want safety of principal and income, a CD ladder can provide you with both steady cash flow, as well as potential liquidity as the CDs will regularly mature.

How to Get Started Laddering Certificates of Deposit

Prior to getting started, you will need to decide on a few factors. These are:

  • What is your overall investment goal?
  • How much do you want to invest?
  • How many certificates of deposit do you want in your CD ladder?
  • How much do you plan to invest into each individual certificate of deposit?
  • How much time do you want to have between the maturity dates of each of the CDs?
  • When do you want your first certificate of deposit to come due for reinvestment?

You should also research where to get the highest CD rates. Although many financial institutions offer CDs, they may have differing interest rates – even on CDs with similar deposit amounts and maturities. You may even consider looking online to purchase CDs, as many online financial institutions offer these investments as well.

Read More:

  • Best CD Rates – find the best CD interest rates for your investment
  • CD Rate Calculator:  how to calculate the interest return on CDs.
  • CD Interest Rates: important facts to know about CD interest rates.
  • CD Penalties:  potential CD penalties that any investor needs to watch out for.
  • CD Investor Facts: overview of key facts that any investor needs to understand before making a CD investment.