For a review of laddering, see CD Ladder Basics.
Flexibility
CD ladders allow for flexibility. You know that a portion of your CD ladder will mature periodically (every year, let’s say) - so you can count on easy access to that money in case you need it.
Some people keep their emergency savings in a CD ladder, hoping that no emergency will be big enough to wipe out too many CDs. You might pay for the emergency with credit and pay off the debt if a CD will mature soon. Alternatively, you might just cash out the CD early and pay any penalties.
If you put all of your money into one long-term CD - instead of laddering - you’ll have to wait for that CD to mature or pay a hefty penalty on all of your money. By using a CD ladder, the money is broken into smaller chunks so you can either wait for maturity or break a smaller CD.Changing Rates
CD ladders are also useful because you reduce the chances of buying CDs when rates are at their worst. Instead of putting all your eggs into one basket, you spread them out and systematically invest. It is difficult to predict if CD rates will go higher or lower in the future.
What happens when your CDs mature? Will rates be higher or lower at that time? Without knowing the future, you can’t predict the optimal time to have your CDs mature. By using a CD ladder, you always have a CD maturing soon. Sometimes rates will be great, and sometimes they’ll be bad, but over time you’ll get decent returns.
Decisions, Decisions
For many, CD ladders are just a way to make life easy. Instead of trying to predict rates and chase the best rates, you can follow a simple plan. You don’t have to think too hard whenever a CD matures - you just reinvest into the longest maturity on your ladder. If your time is better spent (or you can earn more) on other things, a CD ladder might be a good idea.
