While many people invest in CDs, not everyone wants to keep all of their savings in a single investment for a few reasons: If you need the money before the CD matures, you may have to pay a penalty to withdraw. Secondly, if rates rise, you’ll need to wait until your CD matures to reinvest and take advantage of the better rate.
It’s for these reasons, among others, that many investors choose to use a CD ladder investment strategy, which involves putting money into several certificates that mature at different times.
What Is a CD Ladder?
A CD ladder gives investors more access to their money and allows people to take advantage of rising interest rates or keep a better interest rate. Rather than having your money tied up in one CD, you’ll put your cash in a variety of CDs – from short-term to longer term ones. When the shortest term CD comes due, you might take those dollars, and the interest paid, and reinvest it in a longer term CD. If interest rates rise, then that new deposit will pay you more than the CD that just matured.
CD Ladder Strategy
Here’s how to ladder CDs: Essentially, take the amount you want to save and split it into multiple parts. You can use the same strategy with as many different parts as you like, but for the purposes of explaining the process, we’ll start with an example of five.
SAMPLE CD LADDERING STRATEGY: If you have $100,000, and would like steady access to your money over 5 years, you could divide that sum into 5 equal parts — $20,000 per CD — and invest it in a series of CD terms with incremental maturity dates, as shown below.
$20,000 -> 12-month CD
$20,000 -> 24-month CD
$20,000 -> 36-month CD
$20,000 -> 48-month CD
$20,000 -> 60-month CD
In 12 months, when the first investment matures, consider depositing that money into a new five-year CD. If you continue reinvesting in your maximum selected term every time a certificate matures, then you’ll build a long-term ladder of savings that offers you steady access to your funds while earning a higher Annual Percentage Yield (APY).
Even better, if APYs rise, you won’t just earn more on every new five-year deposit — you’ll also generate additional savings as you’re now investing the principal and the interest into that new CD.
While most banks have some sort of CD offering, PurePoint Financial has many different term options to choose from, from six to 60 months. Each comes with a different APY, and they can easily be opened online or by calling our Client Support Center. They’re also insured up to the maximum amount by law, by the Federal Deposit Insurance Corporation (FDIC). Please note deposits of PurePoint Financial and MUFG Union Bank, N.A. are combined and not separately insured for FDIC insurance purposes.
CD Ladder Example
Here is a five-year CD ladder example using sample APYs to give you an idea of how much your savings can grow with a CD ladder strategy.
Savings amount: $100,000
Split into five ways: $20,000 per CD
The value of your CD ladder at the end of each year (doesn’t include reinvestment):
Year
Amount
APY
Est. Value of ladder
12 month
$20,000
2.75%
$102,880
24 month
$20,000
2.85%
$105,894
36 month
$20,000
2.90%
$109,039
48 month
$20,000
2.95%
$112,300
60 month
$20,000
3.00%
$115,669
The Result:
According to Interest.com, which has a CD ladder calculator, employing this kind of CD ladder investment strategy could earn an investor $115,669 over five years with an average APY CD ladder rate of 2.88%. If you put $100,000 into a one-year CD with a 2.75% APY and rolled it over into subsequent one-year terms, you could earn $114,527. In other words, a CD laddering strategy could net you $1,141.40 more.
Why Build a CD Ladder?
A CD ladder can be a good investment because it’s flexible. It can be customized to a person’s needs and, can potentially earn you more money in the long run than if you only invested in a single CD.
Ultimately, CD laddering gives people peace of mind — you can feel good knowing that at least one or more CDs would be maturing sooner rather than later and take advantage of better rates if they become available. Or, if overall APYs do fall, then the money you invested in those long-term CDs will earn you more than you might have been able to otherwise.
Is a CD Ladder a Good Investment?
A CD ladder is a popular CD investment strategy. It helps to minimize interest rate risk with incremental access to your money and greater long-term earning potential. Whether it’s right for you will depend on your personal situation and your financial goals.
Offerings and APYs are an important part of deciding where to save, and the multiple CD terms offered by PurePoint provide a variety of savings options and a highly-competitive APY to help you earn more. Now that you understand how CD ladders work, they can become another option in your investment toolkit.
Begin dialog: About Mitsubishi UFJ Financial Group
About Mitsubishi UFJ Financial Group
Mitsubishi UFJ Financial Group (MUFG) is one of the world's leading financial groups. Headquartered in Tokyo and with approximately 350 years of history, MUFG is a global network with 1,100 offices in over 49 countries and regions. The Group has over 140,000 employees and about 300 entities, offering services including commercial banking, trust banking, securities, credit cards, consumer finance, asset management, and leasing.
The Group's operating companies include Bank of Tokyo-Mitsubishi UFJ, Mitsubishi UFJ Trust and Banking Corporation (Japan's leading trust bank), and Mitsubishi UFJ Securities Holdings Co., Ltd., one of Japan's largest securities firms.
Through close partnerships among our operating companies, the Group aims to "be the world's most trusted financial group," flexibly responding to all of the financial needs of our customers, serving society, and fostering shared and sustainable growth for a better world.
MUFG's shares trade on the Tokyo, Nagoya, and New York (NYSE: MTU) stock exchanges.
You are about to leave the PurePoint® Financial website.
By clicking on the link below, you will leave the PurePoint website and enter a privately owned website created, operated, and maintained by another unaffiliated business. By linking to the website of this private business, PurePoint is not endorsing its products, services, or privacy or security policies.
If you accept third-party goods or services at our website, the third party may be able to identify that you have a relationship with us (for example, if the offer was made only through our site).
The information that this private business collects and maintains as a result of your visit to its website, and the manner in which it does so, may differ from the information that PurePoint collects and maintains, (please refer to the Terms of Use and Privacy Policy for privacy protections PurePoint provides to its website visitors). If you provide the business with information, its use of the information will be subject to that business’s privacy policy. We recommend you review their information collection policy, or terms and conditions, to fully understand what the business collects. We are not responsible for the information collection practices of the other websites that you visit and urge you to review privacy policies before you provide them with any personally-identifiable information.
If you wish to continue to the destination link, press Continue.
