How to ladder Certificates of Deposit

October 20, 2020

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What is a Certificate of Deposit (CD)?

A Certificate of Deposit (CD) is a low-risk, FDIC-insured investment product that typically earns a higher rate of interest than a regular savings account or money market account. A CD, also called a Time Deposit, provides a premium interest rate in exchange for a lump-sum deposit being left in the account for a specified length of time or term.

CDs are available with many different terms, for example, from 3-month to 61-month terms. The interest rate is locked during the term of the CD until it reaches its maturity date. A penalty may be imposed on a CD if you withdraw any of the principal before the maturity date. When the CD matures, you can withdraw the deposit and interest earned, renew the CD at the current interest rate, or open a new CD with a different term.

Laddering CDs

Some people choose to ladder CDs; a CD ladder is an investment strategy that allows an investor to make the most of higher interest CDs while maintaining some liquidity in savings.

To make use of this strategy, a person divides their lump sum investment in a series of individual CDs with staggered maturity dates. For example, if you had $3,000 to invest, you could divide your money into three CDs, such as a 12-month CD, an 18-month CD, and a 24-month CD.

A graph illustrating an example of a CD ladder strategy
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As each CD matures, to continue your CD ladder, you would replace the maturing CD with another CD with the longest term in the ladder – in this case, 24 months. This structure allows you to reinvest your money at regular intervals, making the most of compounding interest in FDIC-insured investments that offer a predictable rate of return.

A CD ladder strategy could be an option to meet your short-term savings goals or when you have a fiduciary responsibility to make a conservative choice with an investment. Keep in mind, other investment vehicles may offer better returns over the long term.
The information provided in this article is meant for educational purposes only and is not advice. Please speak with a Customer Service Representative for specific details on RSI Bank's deposit programs, such as Certificates of Deposit, savings accounts, or money market accounts.