Does CD Laddering Matter When You're Tying Up Your Money Long Term?

There are benefits and drawbacks to opening a CD. On the plus side, CD rates tend to be more generous than savings account rates. Plus, CDs guarantee you a specific interest rate on your money for a preset period of time. When you put money into a savings account, you might start out with a certain interest rate, only to see it drop as market conditions change.

The downside of putting money into a CD, though, is having to commit to its term. Whether you open a 6-month CD, a 1-year CD, or a 5-year CD, you're pledging to keep your money where it is for the duration of that period. And if you cash out your CD before it matures, you risk being penalized for that.

The extent of that penalty will depend on your bank. At Capital One, for instance, the penalty for cashing out a CD early with a term of 12 months or less is three months of interest. For a CD term of over 12 months, it's six months of interest.

You might open a CD with every intention of keeping your money in place until that CD comes due. But sometimes, unforeseen circumstances or expenses can arise that might force you to tap a CD early and take a penalty. That's why laddering your CDs is a strategy worth employing. But is it always worth employing?

The upside of a CD ladder

With a CD ladder, you have money coming due at various intervals instead of having all of your cash tied up for the same time period. What you might do to build a CD ladder is open a 3-month CD, a 6-month CD, a 9-month CD, and a 1-year CD at the same time rather than put all of your available cash into a single 1-year CD. That way, you have money freeing up every three months over the course of that year.

Another option for building a CD ladder is to open a 1-year CD in January, a second in April, a third in July, and a fourth in October. This effectively achieves the same goal of having some of your money free up every few months during the year so that if a need for cash arises, you have access to some of yours.

Laddering your CDs could help you avoid a costly penalty. So it's worth doing that for shorter-term CDs. With longer-term CDs, it may not be as necessary.

When you're tying up your money for the long haul

CDs come in different terms, and you may decide to open a 4- or 5-year CD in an effort to save for a longer-term goal. In that case, laddering your CDs isn't a bad idea. But instead, you may just want to keep a nice pile of cash on hand in savings for emergencies, and then commit to your CD and write off access to that money until it comes due.

This isn't to say that you couldn't open, say, a 1-year CD, 2-year CD, 3-year CD, and 4-year CD instead of a single 4-year CD. But once you start looking at long-term CDs, you're making a much bigger commitment than with a shorter-term CD. And you need to make absolutely certain you're covered for emergencies before diving in.

From there, a CD ladder may not offer you so much value. If you lose your job and have to wait two months to access funds from a CD, that might help in a case where your CD ladder has funds freeing up every three months. You may be able to tide yourself over in that situation.

But if you lose your job and your next CD isn't coming due for another 11 months, you're going to have to come up with another plan for accessing money -- either that, or resign yourself to a penalty. But at that point, it may not matter whether you have money next coming due in 11 months or 47 months from now.

All told, CD laddering is a smart strategy to employ. It may not offer quite as much benefit in the context of long-term CDs, though. So if you'll be building one of those, make absolutely sure you're able to part with your money for as long as you think you can.