What is a CD Ladder?

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A Certificate of Deposit (CD) ladder is an investing strategy in which multiple CD’s with differing maturities are purchased at the same time. CD’s typically have some of the highest rates of return within federally insured deposit accounts, but the funds are locked in the CD for a stated period. An effective ladder strategy can maintain some liquidity while generating greater returns, when compared to short-term CD rollover.

CD ladders can increase return over the long run.

Assuming interest rates remain steady, CD ladders will provide an increased return when compared to the rolling-over of short-term CD’s during the same period. This can be illustrated in a very simple 2-year example:

Let’s say you have $1M to invest, and a one-year CD yields 1% interest. Investing $1M in a one-year CD yields $1.01M after one year. And reinvesting in another one-year CD will yield $1,020,100 at the end of year two, representing a total return of 2.01%.

On the other hand, consider dividing the same $1M into two equal CD’s of $500k – one in a one-year CD yielding 1% and the other into a two-year CD yielding 1.2%. After 1 year, you will be left with $505k cash and $506k of value in the two-year CD that matures in one year. To maintain the ladder’s structure, you would reinvest the $505k into a new two-year CD, again at 1.2%. Then at the end of year 2, you’d be left with the cash from your original 2-year CD of $512,072 and your half-matured 2-year CD valued at $511,060. The total portfolio value of $1,023,132 now represents an overall return of 2.31% over the 2 years – a 30 basis point increase over the first scenario.

As the ladder is extended further into the future, the rate of return also increases. Continued reinvestment into long-term CD’s will result in a portfolio consisting of all long-term CD’s with staggered maturities, which generally yield more than short-term CD’s.

CD Laddering Offers Flexibility.

One worry of investing long-term is that interest rates might rise over the course of the investment, leaving some return on the table. A CD ladder can be tailored to personal savings goals or economic projections to maximize return. If interest rates are clearly rising, it may be beneficial to put a higher percentage of the ladder in short-term CD’s. Likewise, if a saver wants to maintain relative liquidity, a higher makeup of short-term CD’s could be favorable.

If interest rates rise unexpectantly, a well-designed CD ladder will have some funds maturing in the near-term that can be used take advantage of the better rates. If there is a sudden drop in rates, CD ladders will already be invested in long-term CD’s that will be locked into the higher rates.

Ladder CD’s to match spending schedules.

Those businesses with short or medium-term savings targets are in the best position take advantage of the superior rates offered by CD’s. But in many cases, liquid funds are needed to meet expenses in the short-term. In this case, a CD ladder can be an effective strategy.

Consider another simple case: A school district has issued bonds for a large project and will receive a large sum of money up-front. This project requires the district to pay a few contractors six months into the project and another at completion, which will be a year or more. Instead of allowing the cash to languish in a low-interest savings account, the district could purchase timed certificates of deposit that will expire just before the projected payments are due.

CD’s are a good option for organizations who want safety and predictability.

One great aspect of a CD is that the FDIC will insure deposits of up to $250,000 per depositor at member banks. This ensures absolute safety of the principle of those CD’s up to the limit. However, this may be a problem if your cash reserves total more than $250k.

In recent years, we at the American Deposit Management Co. (ADM) have leveraged our proprietary fintech to overcome the traditional FDIC / NCUA limits on deposits, including CD’s. If you’re not familiar, fintech is short for financial technology and it has disrupted how companies manage their finances. This technology allows ADM to spread your cash among their network of hundreds of banks and credit unions, which in-turn allows your business to protect up to $100M in cash with FDIC or NCUA insurance. This all happens with a simple application and a single deposit, and you keep your current bank.

Should your business implement a CD ladder strategy?

CD ladders can be a good option for those organizations who want to protect cash reserves, have predictable cash flows, and achieve better returns. A carefully crafted CD ladder, in conjunction with ADM’s proprietary fintech, can make sure your organization is getting access to extended safety and nationally competitive returns on its cash.

The MOST safety and the MOST return for your CD Ladder Strategy

If you’re looking for the safety and predictability of a CD ladder strategy, contact a member of the ADM team. In the meantime, be sure to follow us on LinkedIn, Twitter and Facebook to stay up to date with our valuable market insights and interest rate updates.


*American Deposit Management Co. is not an FDIC/NCUA-insured institution. FDIC/NCUA deposit coverage only protects against the failure of an FDIC/NCUA-insured depository institution.

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