CD Laddering and Other CD Inflation Options

CD laddering is the strategy of dividing your savings into multiple CDs with different maturity dates. This technique allows you to take advantage of the long-term CDs’ higher interest rates while keeping the flexibility of short-term CDs.

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What Is CD Laddering?

Some people use CD laddering to get the most out of their certificates of deposit (CDs). Understanding the benefits of laddering CDs and how to use this technique to your advantage is a core component of financial literacy.

With CD laddering, you divide your deposit into CDs with different maturity dates. As each CD matures, you can redeposit your money into a longer-term CD, adding more rungs to the ladder.

Advantages of CD Laddering

CD laddering is a sound financial strategy that allows you to take advantage of some of the best features of CDs. You can grow your savings with higher annual percentage yields (APYs) and greater flexibility to access your money.

Advantages of CD Laddering
  • You can access your money once your shorter CDs mature if you need to.
  • You can take advantage of higher interest rates offered by longer-term CDs.
  • If interest rates rise as your shorter CDs mature, you can redeposit at a higher rate than the long-term CDs you’ve already established.

Disadvantages of CD Laddering

Although it’s generally considered to be a great way to reach your savings goals, there are some drawbacks to using the CD laddering method.

Disadvantages of CD Laddering
  • Although CD rates are higher than those of savings accounts, the APY isn’t quite high enough to keep pace with inflation.
  • As interest rates fluctuate, you could get stuck with lower rates when you go to redeposit your shorter-term CDs, making less interest than you would if you had kept all your money in a long-term CD with a better rate.
  • CDs have the advantage of being backed by FDIC insurance, but you may get a better return elsewhere by investing money in stocks, mutual funds or other securities.

How Do CD Ladders Work?

To better illustrate how CD laddering works, let’s look at an example. A five-year CD ladder with a $25,000 total deposit might look like this:

Five-Year CD Ladder
  • $5,000 in a one-year CD at 1.00% APY
  • $5,000 in a two-year CD at 1.10% APY
  • $5,000 in a three-year CD at 1.20% APY
  • $5,000 in a four-year CD at 1.35% APY
  • $5,000 in a five-year CD at 1.50% APY

When your one-year CD matures, you’ll have $5,050. You can cash out and keep your money or roll it over to a new five-year CD with potentially a better interest rate than the five-year CD you opened the year before.

As your CDs mature each year, you can redeposit them into new five-year CDs that continue to mature once a year. With this, you can take advantage of the higher APY of the five-year CD while still being able to access some of your money once a year without incurring a penalty.

Long-Term CD Ladders

Long-term CD ladders follow the same principles as regular CD laddering, but using longer-term CDs. So instead of laddering your accounts into five-year CDs as in the example used above, you would roll those deposits into 10-year CDs or longer.

This procedure is best for jumbo CDs, which contain $10,000 or more in deposits. You’ll earn higher rates on longer terms, and the interest you’ll earn from a large deposit amount might make it worth having your money locked away for the long period of time. A long-term ladder of jumbo CDs can be a useful technique for maximizing the return on a large cash portfolio in a risk-free way.

Mini CD Ladders

The inverse of a long-term CD ladder is a mini CD ladder, which is composed of CDs with shorter terms. For example, you may deposit your money across CDs with terms of three months, six months, and twelve months. Doing so is a good way to get a competitive return on your cash deposits even if you don’t want your money to be inaccessible far in the future, or if you expect that interest rates will rise soon.

Uneven Splits

In the example used previously, the same amount of money was deposited in each CD. Some people choose to allocate their money in different amounts across their CD ladder, a strategy referred to as uneven splits.

You can structure your CD ladder in different ways depending on your savings goals. If you’d prefer to have access to more of your money earlier, you could put higher deposits in your one- and two-year CDs and lower deposits in the longer-term accounts. Or, if you want to maximize the interest you’ll earn, you can put more of your money into the longer-term CDs that offer a better APY.

What Are Other CD Strategies in Times of Inflation?

The APY on most short-term CDs is not high enough to keep up with inflation, which is why many people use CD laddering to split the difference between the flexibility of short CDs and the greater returns of longer CDs. Still, there are a few other CD options that can help stave off the devaluation of your savings that inflation can cause.

First, you should always shop around and try to find the best rates for CDs on the market. Research the current inflation rate and try to find CD rates that come as close as possible to matching or beating it. This can be tricky when prices are climbing quickly, but getting the best rate possible on a CD will be better than letting your money sit in a low interest checking or savings account.

You may also want to consider depositing in different types of CDs. No-penalty CDs offer lower interest rates but allow you to withdraw your money at any time without paying an early withdrawal fee. This might be good for you if you want to be able to jump on new, higher interest rates right away.

Bump-up CDs are another strategy to take advantage of interest rate rises. This type of CD allows you to bump up your APY if interest rates go up during your CD’s term. Typically, you’ll only be allowed to increase the APY once during a CD’s term, but it may still be a worthwhile choice to open a bump-up CD if you’re confident interest rates will rise in the near future.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: April 21, 2022

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