Investing in the short-term is a great way to save money to meet goals in the near future.
One of the ways that Northwest Community Credit Union provides short-term savings options is through Certificates of Deposit, which are timed deposit accounts that yield higher interest than our regular savings accounts.
However, withdrawing funds from these accounts early can incur interest penalties. This may not be ideal if you want regular access to your money, but still want to invest for the future. This is where a savings strategy called CD laddering comes in.
What is CD Laddering?
CD laddering is a short-term investment strategy where multiple CDs are created in a “ladder.” Instead of placing a large amount of funds into one CD, we portion the funds into multiple CDs, with staggered maturity dates.
When the first CD in the ladder matures, you will either move those funds to the bottom of the ladder (creating a longer-term CD with a higher interest rate) or close out the CD and use the funds if needed.
Here’s how this works in practice with a 4-year savings plan:
| CD Term | Amount Deposited | APY* | Balance When CD Matures | Interest Earned |
|---|---|---|---|---|
| 12-month Traditional CD
|
$2,000 | 0.75% | $2,015.05 | $15.05 |
| 24-month Traditional CD | $2,000 | 1.00% | $2,040.24 | $40.24 |
| 36-month Traditional CD | $2,000 | 1.25% | $2,076.02 | $76.02 |
| 48-month Traditional CD | $2,000 | 1.50% | $2,122.83 | $122.83 |
| Total Interest Earned | $254.14 | |||
When the 12-month CD matures, the funds can be rolled over into a new 48-month CD. And it'll only be 12 months until the next CD matures. Every prior CD moves up one rung in the “ladder”, now that a year has passed.
Compare this strategy to how the same total funds ($8,000) would accrue when placed into a single 12-month CD (rolled over for four years):
| CD Term | Amount Deposited | APY* | Balance after 4 Years | Interest Earned |
|---|---|---|---|---|
| 12-month Traditional CD | $8,000 | 0.75% | $8,242.36** | $242.74 |
*Annual Percentage Yield based on current rates as of April 2018
**Assumes CD is continuously rolled over with no change in interest rate
While you would earn more interest letting a lump sum accrue interest in a 48-month CD, this also means that your funds wouldn't be easily accessible for four years. Structuring your CDs to mature in one-year increments provides regular access to these funds, and allows you to either reinvest or withdraw them as they mature.
By utilizing CD laddering, you can also take advantage of our best CD rates and current promotions, year over year, to get the most out of your returns with your CD portfolio.
Because CD laddering is a better way of investing than just opening a single CD, this investment strategy is great for:
- Making the most of your tax return
- Covering future college expenses for your children
- A down payment on a home, car, or other large purchase
- Building a rainy day fund
If you’re interested in developing a CD laddering plan at NWCU, visit your local branch or call us at (800) 452-9515.
Interest is compounded and credited monthly. Interest begins to accrue on cash and noncash (i.e. checks) deposits on the business day you make the deposit to your account. Fees may reduce earnings. We may impose a penalty if you withdraw any of the principal before the maturity date. Note that withdrawing money or closing a CD early may incur penalties. The amount of the early withdrawal penalty is based on the term of your account as follows: terms of 90 days to 11 months - 90 days, terms of 12 months and over - 180 days. The penalty is calculated as a forfeiture of part of the Interest that has been or would be earned on the account. It applies whether or not the interest has been earned. In other words, if the account has not yet earned enough interest or if the interest has already been paid, the penalty will be deducted from the principal.