Laddering CDs Can Add Liquidity And Return

One of the great drawbacks of this historically low interest rate environment we’re in is that it’s darn difficult to get anything close to a decent return on your cash nowadays. Sure, you can move it into riskier investments like bonds or even high yield bonds to try to juice your returns but a move like that can carry a great deal of risk.

For safety, a lot of people still lean on Certificate of Deposits (CDs). These instruments are FDIC insured so the degree of safety is high. Not a bad idea in uncertain times, right? But to get a greater yield people are locking their money in for longer periods of time. The greatest risk involved with locking in for a longer time period isn’t the safety of the bank or your money. It’s the risk that rates will start moving back up and you won’t be able to take advantage of them.

But what if there were a way to get longer CD rates while maintaining the liquidity needed to take advantage of higher rates? There is actually and it’s called laddering.


Laddering is the process of taking the whole sum of money that you want to invest and dividing it up into different amounts with different length terms in order to have at least a portion of your total investment coming due regularly and keeping it available to invest at potentially higher rates.

For example, let’s say you have $25,000 total to invest. You’d start be splitting that money into $5,000 increments and putting $5,000 into a 1-year CD, $5,000 into a 2-year CD and so on until the final $5,000 is put into a 5-year CD. As each CD comes due, invest the proceeds into a new 5-year CD. After a few years of investing into new CDs, you’ll have a portfolio of five different 5-year CDs but you’ll have one of them coming due every year and ready to reinvest.

This works especially well if you want to continually have the flexibility to reinvest at long term rates yet know that the money can be liquid in case you ever need it for something like a medical bill or planned purchase. Plus, having your portfolio consistently earning 5-year CD rates will usually have you better off as far as total return that taking the entire amount and earning 1-year CD rates.

The drawback, however, of this strategy is that it takes a little time and work. If you were investing everything in a 1-year CD your bank may just roll it over for you automatically into a new 1-year CD every year. With the laddering strategy, you’ll need some extra time and effort to set up the initial ladder and to monitor and reinvest the proceeds. We’re talking about once a year though so the extra effort should hopefully be minimal.

With laddering your CDs, you have a strategy that can potentially have you earning higher returns, providing you with liquidity by having a portion of your portfolio come available every year and lower the overall risk of your portfolio by smoothing out some of the ups and downs in interest rates.

It’s a good strategy to consider if you’re a longer-term investor.

Photo credit: Morten Brunbjerg

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Author Info

This post was written by David Dierking. David lives outside Milwaukee, Wisconsin and has been working in the financial services industry for over 13 years with a background in investments, accounting, and marketing. He earned his Chartered Financial Analyst designation from the CFA Institute in 2004 and was recently published in the Milwaukee Business Journal. You can also check him out at The Ultimate Fit Challenge

One Response to “Laddering CDs Can Add Liquidity And Return”

  1. CreditDonkey |  Apr 28, 2011 at 11:52 am

    Interesting perspective. I have invested a significant amount of money in one CD. After reading this, I think I should reconsider scattering my investments into 4 or 5 CD’s as well. Thanks for the tip :)