Understanding Certificates of Deposit and CD Ladders

Personal savings
Written By:
Ginny Baldinelli, Vice President, Senior Deposit Product Manager
Person looking at laptop computer

A certificate of deposit (CD) is a tool for saving money that can be a clever complement to your personal savings account or money market savings account. CD accounts typically earn higher interest rates than other bank accounts, and they don’t carry the risk of investing in securities such as stocks and bonds. A CD account can be a helpful way to save for a goal like a car purchase, vacation or home down payment because it keeps your money safe and out of reach.
When you open a CD account, you agree to leave the money untouched for a fixed period of time—and you get a higher rate of return as compensation for keeping your funds on deposit for the full term. If you really need the money before the term is up due to an emergency or a change in plans, there are options for that, but you may face penalties for early withdrawal.
Most banks and credit unions offer a choice of CDs, with each CD having its own minimum deposit and term. When you open a CD account, be sure to use a sum of money you won’t need for day-to-day expenses or in the immediate future. If you can, it’s also smart to set aside a rainy-day fund you can easily access for unexpected expenses like car and appliance repairs. Read our blog, Reasons to Have a Rainy-Day Fund and How to Start Yours, to learn more.

How safe are certificates of deposit?

Certificates of deposit are incredibly safe for a couple of reasons. One advantage of CDs is that their rate is generally fixed and guaranteed for the term. Banner Bank does not offer variable rate CDs, although some financial institutions do.
Sometimes banks will feature special certificate of deposit offers, such as bump-rate CD promotions. A bump-rate CD allows your interest rate to increase, but not go down. The bump isn’t automatic; as the CD holder, you notify the bank when you want to exercise the increase. This can be a good opportunity in a rising rate environment.
Another safety aspect of CDs is that when you choose a federally insured bank or credit union, the CD is protected by the same insurance that covers all deposit products. For banks, coverage is through the Federal Deposit Insurance Corporation (FDIC) and for credit unions it’s through the National Credit Union Administration (NCUA). When you open a CD account with a federally insured institution, up to $250,000 of your total funds on deposit at that institution are protected by the U.S. government.

What is a CD ladder and how can laddering CD accounts help your savings?

Certificates of deposit are available at different minimum deposits, interest rates and terms. With a CD ladder, you use that to your advantage by opening a series of CDs with different maturity dates to maximize your return, protect your funds, and have a portion of your money become available at predictable intervals. You might stack or ladder your CDs so one CD matures every 12 months, or you could choose less frequent or less regular intervals.
Here’s a CD ladder example that lets you tap into the higher rates offered by the longer term of a five-year CD, with a CD maturing every year:
For illustration purposes, if you want to invest a total of $12,500, you would divide that into five equal portions of $2,500 to put into five different CDs with varying maturity terms. You’d put one portion into a one-year CD, another portion into a two-year CD and so on through a five-year CD. When your first CD matures in a year, you would use those funds to open another five-year CD. You’d do the same thing when the second CD matures and each year after that until all five portions are in five-year CDs, which tend to offer higher rates of return than shorter-term CDs. The advantage is you’d now have a portfolio of five five-year CDs, with one maturing every 12 months. Laddering this way keeps your money more accessible than if you put it all into one five-year CD.
If you are interested in CDs as a savings tool, visit with your banker about your savings goals and how much you can comfortably set aside using CDs. If you’re interested in laddering your CDs, the team at Banner can help you set up a CD ladder that supports your plan and timeline. We can also introduce you to other tools to help you grow your savings and manage your budget.