CD Laddering: Make the Climb to Financial Success

Golden Dollar Cookie Cutter

It's hard to beat the rock-solid security of certificates of deposit, or CDs. Because they aren't subject to the wild swings of the stock market, they can add steady returns to your investment portfolio.

The key is having a strategy that maximizes your returns.

With a "CD ladder," for example, your money is spread among CDs with a variety of maturity dates. Why is that important? Well, if the economy is in a slump and interest rates are low, you don't get stuck buying a bunch of CDs with low interest rates. Spreading out maturity dates also provides some liquidity, as one or more CDs will always be approaching maturity.

How It Works

Let's use a five-year ladder and $20,000 to invest as an example. Here, you would have five "rungs" of $4,000 each. For the first rung, you would put $4,000 in a one-year CD. For the second rung, you would put $4,000 in a two-year CD, continuing on up to $4,000 in a five-year CD.

  • Rung 1: $4,000 Matures in 1 yr.
  • Rung 2: $4,000 Matures in 2 yrs.
  • Rung 3: $4,000 Matures in 3 yrs.
  • Rung 4: $4,000 Matures in 4 yrs.
  • Rung 5: $4,000 Matures in 5 yrs.

After a year, the one-year CD matures. That means each of the other CDs now are one year closer to maturity (i.e., the two-year CD now matures in one year and the three-year certificate matures in two years).

If you don't need the money for immediate needs, you take the $4,000 plus earnings from the one-year CD that has just matured and roll it over into a new five-year certificate (and put on the top rung of your ladder).

With a CD ladder, you're always replacing the rung that's farthest out (i.e., the CD with the longest maturity). If the economy is slumping and interest rates happen to be low one year, you're only reinvesting a portion of your investment when yields are low. And because you're constantly reinvesting, you don't have to play guessing games with where rates are headed.

The beauty of laddering is that you can adjust the "length" of your ladder however you want. In a low-rate environment, for example, you may want to keep your ladder short. Perhaps you'd create a one-year ladder with four rungs (three, six, nine and 12 months).

Matching Maturities to Needs

CDs typically come with early withdrawal penalties, which can wipe out any returns if you need to take the money out before the term is up. So, make sure the maturities you select work with your cash needs. Here, it may make sense to hold some cash in a high-yielding money market account. You'll earn competitive yields and enjoy access to your money market funds in a pinch so that you donít need access to your CDs.

FDIC Coverage

Federal Deposit Insurance Corporation (FDIC) insurance coverage has been increased from $100,000 to $250,000 for all deposit accounts, including CDs, until the end of 2013. In cases of a CD ladder that exceeds the FDIC coverage amount, you can open accounts in different ownership categories (e.g., individual, joint, trust), or at multiple banks to make sure your CD purchases are covered.

Discover Bank CD Accounts

Discover Bank offers CDs in a wide variety of term lengths, from three months to 10 years. Discover Bank offers a convenient online application at as well as 24-hour Customer Service to allow you to open an account in minutes. Call us toll-free at 1-800-347-7000 for assistance.

Legal Disclaimer: The articles and information provided herein are for informational purposes only and are not intended as a substitute for professional advice.

The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States government. The FDIC protects depositors against the loss of insured deposits if an FDIC-insured bank fails. The FDIC insures deposits at FDIC member banks, including checking, NOW and savings accounts, Money Market Accounts and certificates of deposit (CDs), up to the applicable limits. FDIC deposit insurance has temporarily increased from $100,000 to $250,000 per depositor, per deposit category, through December 31, 2013.

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