A Safe Way to Grow Your Money

The CD Ladder: A Safe Way to Grow Your Money

Written by Nathan Woolard

Looking for a safe, long-term savings option that still gives you access to your money at regular intervals?  CD laddering might be right for you.  A CD (certificate of deposit) allows you to deposit funds into an account for a specific amount of time at a fixed rate.  It’s a secure place to save your money and earn some interest, but it might not always be the best choice for your needs, so weigh your options to see what benefits you can expect.

The most obvious reason to open a CD, especially long-term CDs, is that they generally pack higher interest rates than other savings and money market accounts.  They also offer fixed rates, which means that you’ll keep earning the same amount even if rates drop.  Unfortunately, this means you’ll be stuck with your present level of interest if rates happen to rise.  You’ll also want to wait until the end of your CD’s term before you make any withdrawals; you’ll be charged a penalty fee if you take out any money before the account matures.

Ultimately, opening a CD is a matter of sacrificing accessibility for greater interest.  If you need flexibility to make potential withdrawals as needed, then a CD probably isn’t the right choice for you.  But if you’re looking for a long-term means of letting your money rest and your interest build, then it’s definitely worth consideration.

That being said, there is a strategy to help you get the best of both worlds, and it’s called CD laddering.  The term might sound complicated, but it’s actually a very simple method to follow.  Rather than putting all of your money in a single CD and renewing it repeatedly, split up your savings between multiple CDs and stagger the length of their terms.  In this model, the CDs will mature at different times, alternatively giving you access to your money while still building up interest over time.  For example, rather than putting $15,000 into one account, you can divide it between three CDs:

·         $5,000 in a 1-year CD

·         $5,000 in a 2-year CD

·         $5,000 in a 3-year CD

When your 1-year CD matures, reinvest it into a new 3-year CD.  When your 2-year CD matures, reinvest it into a new 3-year CD as well.  Now you have three 3-year CDs.  With this strategy, one CD will mature every year and give you the freedom to do as you wish with that money, be that withdrawing it if needed or letting it renew.  You’ll also be able to stay on top of changing interest rates; if rates fall, you’ll still have long-term CDs with your current rates, and if rates rise, then you’ll be able to put your maturing CD into a new CD to take advantage of the higher rate.

The above model is just one example of CD laddering.  While equally dividing your investments is a safe approach, you may want to put more of your money in short-term CDs if interest rates are rising, or more in long-term CDs if rates are falling.  You’re free to vary your amounts and your terms to suit your needs in coming years.  You can custom build a ladder that fits your personal situation.

If CD laddering sounds like a smart plan for you, speak to one of our Personal Bankers and we’ll help you get started!  At Success Bank, CDs have a minimum deposit requirement of $5,000, and terms are available for anywhere between six and sixty months.  All it takes is a bit of planning, but once you decide how much you can put away and for how long, then you can sit back and watch your savings grow!