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CD Laddering: What Is It and How Does It Help?

CD Laddering can be a clever way to boost your savings and still have frequent access to your cash.

A Certificate of Deposit (CD) is similar to a savings account in that they are insured by the National Credut Union Association (NCUA) and are virtually risk-free. They differ from savings accounts in that CDs have a specific, fixed term and a guaranteed rate of return. Terms can range anywhere from 3 months to 5 years or longer, and they typically earn a higher interest rate than a savings account. Generally speaking, the longer the term, the higher the interest rate you'll earn. 

How CD Laddering Works

Want the higher interest rates that come with longer-term CDs, but don't want to tie your money up for so long? That's where CD Laddering comes into play. “Laddering” is a strategy of opening multiple CDs, each with a different length of term. Then, as each CD matures, you reinvest the proceeds in a new CD with a longer term. Take a look at the example:

Robert puts $10,000 in a 60-month CD. By doing so, he couldn't take advantage of rising interest rates, and couldn't access (free of penalty) his money during the 5 years. Robert decided to try laddering: splitting the money into five separate CDs with different maturity dates.

  1. $2,000 in a 12-month CD
  2. $2,000 in a 24-month CD
  3. $2,000 in a 36-month CD
  4. $2,000 in a 48-month CD
  5. $2,000 in a 60-month CD

Once the 12-month CD matures, Robert takes the principal and interest earned and reinvests it in a new 60-month CD. That new CD matures exactly one year after his original 60-month CD.  Robert keeps the momentum going, annually reinvesting his matured earnings into new 60-month CDs and earning higher rates. Although each new CD has a 60-month term, because of his initial laddering strategy, he will have access to a maturing CD every single year.

Not only does Robert have annual, penalty-free access to cash, but he's taking advantage of the higher interest rate (60-month CD rate), thus earning the best bang for his buck. Remember, in general the longer the CD term, the higher the interest rate. And if you're enrolled in BECU Member Advantage, you can earn even more on your CDs.

CD Laddering Options

Wish to have faster cash access? Consider laddering on an even shorter calendar – BECU offers terms as short as 3 months. Plus, you can open a CD with as little as $500.

Laddering isn't just smart; it's fun! You're an active participant achieving the best savings rates for your money. Learn more about our CDs and options. You can open a CD in Online Banking, by visiting your local Neighborhood Financial Center or by calling us at 800-233-2328.

Your money is what you make of it – make more! Give CD laddering a try.

*Information does not constitute legal or tax advice.  Individuals should consult with their financial advisor and/or attorney for advice.