Paycheck Chronicles

Use A CD Ladder For Emergency Funds

One popular strategy for earning higher-than-savings-account interest is a certificate of deposit (CD) ladder.  A CD ladder (or laddered CDs) is a way of purchasing multiple smaller CDs rather than one larger CD, staggering the maturation dates.   There are two main benefits to laddering your CDs:  flexibility and higher interest rates.  While you can use a CD ladder for long-term investments such as retirement funds, I am focusing on emergency funds today.


Having staggered CDs allows you keep as much money as possible in certificates while still having quick access to your funds.  Imagine you have six months worth of expenses in an emergency fund, totalling $12,000.  If you put it all in one CD, you will have to choose a single maturation date.  You might choose three months, six months, nine months, or a year.  None of these are a perfect choice because you can't anticipate when you might need those funds.  

By laddering your CDs, you can have a portion of your savings mature each month.  If you needed access to your funds, you could either a) plan ahead and not renew a CD, b) pay for the expense with another payment method, such as a credit card, and pay the bill when the CD matures, or c) cash out just one CD before it's maturation date.  If you don't use them, you can then roll them over and continue the ladder.

Higher Interest Rates

Using a CD ladder can also help you earn more interest on your savings.  Interest rates on CDs increase as the term lengthens.  Using a ladder strategy help you to put more money in longer-term CDs while still maximizing your access.

Using the example above, you could purchase 12 CDs with $1,000 values each.  Using today's interest rates available at Navy Federal Credit Union, that would earn you .75% interest on each CD.  If you put the whole thing in a three month CD, you would only be earning .45% interest.  It's not a huge difference, but it adds up.

Getting Started

There are two ways to start a CD ladder.  You can either make an initial purchase that includes CDs of staggered terms, or start off with one CD and then buy additional CDs as you go.  Since we are talking about emergency funds, which naturally have shorter terms, there is only so much staggering you can do to start.  Most commercially available CDs have a minimum term of 90 days, so you can't very well start with one CD maturing each month.

In our example, you could start by purchasing ten CDs with 3 to 12 month maturation dates.  Next month, you'd buy another twelve month CD, and the following month you'd purchase a third 12 month CD.  At that time, you'd have one CD maturing each month for 12 months.  When they mature, you just roll them over to another 12 month CD if you don't need to use the funds.

Ideally, you would continue to grow your savings, allowing you to purchase longer terms and therefore increase your interest rates.  However, this idea can be used for any size investment and any term-length.

Laddering CDs is a good way to keep emergency funds accessible while still maximizing your interest earnings.  Consider whether a CD ladder would be a good tool for your overall objectives.


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