What is CD Laddering and How Can It Boost Your Cash Flow


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If you are a more conservative investor, especially if you used up a significant portion of your emergency savings during the pandemic, you may be looking for new investment options that offer low risk but can generate some returns. One option to consider is CD laddering.

“Two things work for you with CD laddering: the money you invest is insured by the FDIC (up to $ 250,000 per person) and [you’re] guaranteed profits too, “said Anthony Martin, CEO and founder of Choice Mutual in Reno, Nevada.

For those with a low risk tolerance, CD laddering is a viable option, according to Martin, because:

  • With every CD in your CD ladder, you can secure the interest rates you are guaranteed to earn.
  • This guaranteed growth in your savings makes CD laddering a more conservative investment option as you are less likely to lose your money (as opposed to investing in stocks).

But it’s also important to remember that low risk investments mean lower returns. Here’s what you need to know to add CD laddering to your 2022 financial plan to keep your cash flow strong.

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What is CD Laddering?

You probably have Certificates of deposit or CDs in your portfolio. They are easy to purchase and offer a reliable, low risk savings strategy. But with a little careful planning, you can get even more out of these accounts.

“CD Laddering staggered CD due dates to provide you with consistent cash flow,” said Jim Pendergast, senior VP of altLINE, a division of Southern Bank Company based in Birmingham, Alabama.

Runtimes on CDs are usually between one and five years, Pendergast says, but he cautions against getting the money early could cost a fine. “Instead of putting a lump sum on one CD, you create multiple CDs with different durations,” he says.

For example, put $ 1,000 on a 1 year CD with an APY of 1%, $ 1,000 on a 2 year CD with 1.25% APY, and another $ 1,000 on a 3 year CD with an APY of 1 , 5%.

“You can cash out every year or leave the money on the CD for the next due date,” says Pendergast. “CD Laddering works best with people who deposit money every year and plan their withdrawal times perfectly. It’s great when you have constant cash flow as it allows you to keep a consistent budget and still make money.”

And staggering the due dates can also help you increase your cash flow, says Martin.

Let’s say you create a CD ladder with $ 20,000 that you saved. You put $ 5,000 on a three month CD, $ 5,000 on a six month CD, $ 5,000 on a nine month CD, and $ 5,000 on a 12 month CD.

When you pay off the three month CD, you can plan to spend the interest earned and move the principal to a new CD. Repeat this every time you have a CD that comes to maturity.

“You can reinvest whatever money you don’t need into long-term CDs, which gives you a higher rate of interest than you originally had,” explains Martin

How your timing plays a role in CD laddering

If you invest in several CDs at the same time, you have the option of setting due dates yourself, says Martin.

“Instead of investing all of your $ 20,000 in one CD, you can invest it in five different CDs. [each] with their own expiration date, “says Martin. This allows you to access your money more often – about every six months or every year – and still benefit from higher APYs because you can keep the CD longer for more interest.”

Martin gives two considerations on how you have staggered or staggered your CDs based on your financial situation:

  1. If you can forego the money, you can extend the term and opt for a higher interest rate to make more money.
  2. If you need the cash to supplement your income, you may prefer shorter terms and compromises on lower interest rates.

How CD laddering is different from keeping your money in a traditional savings account

There are some differences between traditional savings accounts and laddering CDs. For one, you lock your APY for a period of time, such as a year or two. With a traditional savings account (even a high yield account) your APY can go up and down without warning.

“Money in your savings account depreciates over time as inflation lowers the value of the dollar,” notes Pendergast. “However, when you invest in a CD, you can get constant interest on your money. Even if it doesn’t look like much, it never goes down in value, which makes it a safer bet than other investments.”

What if you have to break a CD?

Before opening your CD, make sure you understand how any penalty fees may affect your earnings. Check with your bank, credit union, or financial institution before locking up your money.

When buying CDs, Pendergast advises looking for low liquidation fees. “If you are in an emergency and need money immediately, you need a CD that does not charge high advance subscription fees,” he says.

Some fees are only 60-day interest while others are only 18-month interest, he says.

“If you’re not careful, early withdrawals can cost all of the money earned, so choose a bank with a low early withdrawal fee,” explains Pendergast.

Would you like more information about CDs? Take a look at the summary of Select best CDs. Looking for an investment strategy that offers higher returns? Check out our roundup of the best investing apps.

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Note to editors: Opinions, analysis, reviews or recommendations expressed in this article are solely those of the Select editorial team and have not been reviewed, approved or otherwise endorsed by third parties.

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