Here’s the no frills answer: A CD ladder is a savings strategy where you spread a lump sum of money across multiple CDs (certificates of deposit) with different maturity dates.
What does that really mean? Well, it’s a more tactical way to save money.
The goal of CD laddering is to lock in high APYs (Annual Percentage Yields) across multiple CDs, instead of lumping all of your funds into one CD. Those multiple certificates of deposit will mature (in other words, the CD term has ended) at different points in time. As each CD matures, your cash will free up to either use or rollover into new CDs.
If this is feeling a little complicated, don't worry. Read on. Just think of it as learning the rules to a new game. We’ll explain how it works, outline some examples and show you how to build a CD ladder that works for you.
Let's start with a quick refresher. A Certificate of Deposit (CD) is a type of savings product that typically has higher interest rates than a traditional savings account, and a fixed maturity date. Most CDs are FDIC-insured, so you can rest easy knowing your money is protected. The catch is that your funds are locked for a set amount of time, meaning you typically can’t withdraw your balance before the CD matures without paying a penalty.
Side note: No-Penalty CDs typically allow you to withdraw your balance to your bank account beginning seven days after funding, with no penalty. However, for the purposes of this article, we’ll be looking at traditional CDs, where you’re locked into a rate for a fixed amount of time.
When you put all of your money into a single CD, your money is tied up until your CD matures (unless you’re willing to potentially pay an early withdrawal penalty). We hate to use the cliché of having all of your eggs in one basket, but…that’s really what you’re doing.
That's where CD laddering can come in handy.
By spreading your pot of money across multiple CDs, a CD ladder offers you flexibility. Part of your money becomes accessible each time one of your CDs mature.
It’s also worth noting that while fixed-rate CDs provided a guaranteed rate of return, CD rates available in the market may fluctuate depending on a number of factors. Since you can’t really predict whether CD rates will go up or down, laddering your CD lets you hedge against the unknown of how rates will shift.
Another perk of CD ladders? You’re able to take advantage of rates on longer-term CDs, which are typically higher, without committing all of your money to that CD.
Before we get into the details of how CD ladders work, let’s start with an example. Say you use $25,000 to build a CD ladder that matures in one-year increments:
When the 12-month CD matures, open a new five-year CD. When the 24-month CD matures, open another five-year CD, and so on. In five-years, you’d have only the higher-yielding, five-year CDs in your ladder – and every year, one of them would mature.
The idea is that the first part of your ladder is built with baby steps (shorter-term CDs) so that you have access to some amount of cash each year. As time passes, your ladder will evolve so that it’s primarily constructed of longer-term CDs (earning you higher APYs), but you still have access to cash each year.
Let’s assume you want to put your money in CDs that earn the highest possible interest rates. Typically, this means selecting CDs with longer terms. You might be uneasy at the thought of locking up all of your cash for an extended period of time. So what do you do?
In this case, you could place smaller amounts of money in short-, medium-, and long-term CDs that mature at staggered intervals—like the steps of a ladder. When your short-term CD matures, you can take that money (and the interest you’ve earned on it) and put it in a long-term CD. Alternatively, if you need the cash when the CD matures, you can withdraw the funds.
Eventually your ladder would consist of only long-term, higher-yield CDs. This laddering approach allows you to gradually commit cash to longer-term, typically higher-yield CDs.
There is no “best” strategy – it’s about picking the strategy that’s appropriate for you based on how frequently you’ll want access to the cash and what you’re trying to save money for. Here are some general tips:
*Annual Percentage Yield (APY): stated APYs are for illustrative purposes only and do not necessarily reflect APYs that are currently available.
This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.