CD are considered one of the most appealing saving plans due to the fact that they carry a higher interest guarantee. With most accounts having their annual returns well above the 2.50% mark, they pay higher than your average savings account. The interests offered here are fixed and certificate of deposit (CD) account doesn’t attract additional overheads like account management charges or processing fees.
The savings account, however, has one major drawback; they are a fixed term investment. You cannot access the funds saved herein before the maturity of the savings term that usually ranges from three months without forfeiting all or a percentage of the interest earned.
The fact that their interest rates are fixed means that you also won’t benefit from any increments should the banks decide to raise this interest upwards. These have effectively birthed CD Laddering. But what is it and how does it work?
What is CD laddering – How does it work?
Essentially, CD laddering refers to the act of splitting your savings and investing them in several different fixed term CDs offered by one banker – CD Ladders. For instance, if you intended to buy certificate of deposit worth $10,000 that locks up your savings for five years, the chase for higher interest accounts may tempt you into going for the one-year CDs and keep renewing it for the five years.This ensures that you have a relatively easy access to your funds should you need them before the five years and that you take advantage of any interest rate increments.
This process is rather crude and has since been replaced by the more effective CD Laddering that involves investing this cash in five $2,000 accounts maturing in 1, 2, 3, 4, and 5 years respectively. This still gives you access to funds should you need them, allows you to take advantage of interest rates and – more importantly – shield you from significant interest loss should interest fall.
After the maturity of the one-year CD, you may consider investing it in another five year CD at a higher interest rate. You then continue the same trend with the second and all the laddered CDs with the aim of reaching a point where all you’re your savings portfolio comprises of several long-term CDs that earn you maximum interest. And it all starts with finding a financial service provider, especially the digital banks – with the highest CD rates.
How to create a CD Ladder?
Interestingly, there is no one-fit-all strategy for creating a CD Ladder. You can only customize it to suit your individual needs. Some of the factors that you, however, need to put into consideration when deciding on the best laddering strategy include your need for incomes and ease of CD rate liquidation as well as the preferred term of the CD Ladder. You may also consider factoring in such projected economic changes as possibility of interest rates going up or down in the foreseeable future.
Why invest in CD laddering?
- Increased accessibility to your funds
Accessibility is perhaps the biggest advantage of CD laddering. With this option, you can access your money within convenient intervals without losing interest or incurring any withdrawal penalties. Simply create a perfect ladder for your savings to ensure you have annual access to your CDs. Laddering ensures different accounts mature every year allowing you to reinvest in better opportunities. It is also a better offer especially if you need to access your money at frequent intervals.
- Better interest rates
With laddering, you can save part of your money in CDs that mature at a later time to enjoy the higher rates associated with such accounts. However, you will still have certificates maturing at frequent intervals. With a solid ladder structure, you can enjoy high interest rates for all your CDs. It is also possible to have certificates maturing every year at high rates if you reinvest your short-term CDs for longer periods. What’s more, CDs offer fixed interest rates that do not change for the entire duration. The calculated returns remain the same for each certificate provided you do not withdraw prematurely.
- Increased flexibility
CD laddering allows you to determine how you would like to split and invest your savings. Instead of a single CD renewed after a specified period of time, you can create multiple accounts maturing at staggering intervals. Besides the minimum deposit required, you have total control over how much you want to save and can determine the returns even before opening an account.
- Safe and secure investment
CD laddering accounts are not only insured and protected, but are also very secure. Unlike other personal savings accounts, the interest rate remains unchanged throughout the period of investment. This allows you to calculate how much money you will have when your certificate matures. What’s more, you can reinvest your short-term CDs when interest rates go up. If the rates fall, you will still enjoy the high rates of your long-term certificates. Most banks are also insured members so your savings will be safe.
Criteria used to rank the most viable CD Laddering financial institutions:
- Minimum deposit
- Eligibility requirements
- Ease of account opening
- Interest rates
- Early access policy
- Types of CDs available
- Account overheads
Top 10 CD laddering offers
What to look for when creating a CD Ladder:
- Bank reputation
Choose banks and financial institutions with a thriving reputation in the area. You can look up reviews from customers and expert rating sites to gather more insights about the nature of services provided, customer service, offers and quality.
- Account opening and management policies
Most banks have minimum and friendly requirements for opening personal savings accounts. Simply go through all the terms and compare them with other alternatives before making your final decision. Also note the minimum deposit required for every CD account you open.
- Interest rates
Banks with higher interest rates are obviously more attractive. Compare annual percentage yields against length of time to determine the best deals for your savings. You can also check if early access is allowed and how it affects your interests.
- Security features
Choose secure banks that can guarantee your money will be safe. They should also be members of FDIC (US) or FSCS (UK). They should also offer seamless customer support and communication. Other security features include regular virus sweeps, encrypted communication, firewall and SSL.
- Money accessibility
Some banks offer checking accounts and ATM deposits/withdrawals while others don’t. Some have local branches while others only offer online platforms. Make sure you understand and are comfortable with the nature of the CD service provider before depositing cash with them.
Certificate of deposit savings accounts offer an ideal way to lock up your savings with guaranteed returns. Laddering simply helps you increase the total returns by enjoying higher interest rates without sacrificing access to your money. If you are in urgent need of cash, creating a ladder ensures you have access within a shorter period of time compared to single renewable CDs. It is imperative that you carefully evaluate your financial plan before opening CD laddering accounts. While this option can help you earn pre-determined interest on your savings, it does not suite everyone. Like most fixed rate savings accounts, you will not be able to withdraw money until the term matures. And any attempt to access part of the funds or liquidate the CD requires that you forfeit a significant portion of the interest already earned. It is therefore suitable if you have a lump sum of cash you will not use for a year or so.
This refers to a savings strategy that involves splitting your savings and depositing them into multiple CD accounts with staggered maturity dates. You then have to keep re-investing these funds as they mature into different longer-term and higher interest rate CDs with the goal of having all your CDs locked in high reward schemes.
No. Most CDs are offered by credible banking institutions – either online or main-street – of solid repute that are also licensed and regulated by the different national finance regulatory agencies. In the United States, your deposits with these institutions are also insured by FDIC – for commercial bank savings – and NCUA – for savings held with credit unions.
The answer to this is highly dependent on your need for income and access to your funds. If you are after regular incomes and easier access to your funds, consider the short-term CDs, usually the three- six-month CDs or the longer term CDs, up to ten years, if you are after maximal returns.
Start by identifying a CD rate service provider with the most attractive interest rates and fixed terms that suit your income and cash access needs. Then split your savings into equal parts depending on the number of ladders you would like to maintain and save.
CD ladders were to a large extent introduced to help address the challenge of ease of access to savings locked up in a CD account. If you plan on using these funds before maturity of the more profitable long-term CD, consider going for the short-term CDs. Note that you will still be subjected to harsh loss of interest penalty if you wish to withdraw funds from an active CD.
Most CD service providers maintain packages for terms as low as three months and offer to lock your savings for as long as 10 years. It is up to you to decide what term best suits your saving and return needs considering that the longer the term, the higher the interest rate.
Because it lets you save in both short and long term CDs, effectively exposing you to maximal returns while granting you greater access to your deposited funds cash.
Saving all your funds in one general term CD locks you out of such benefits as access to your funds, increases your interest penalties for withdrawals made and puts you at a disadvantage should the interest rates for future CDs go up.