Many people think of certificates of deposit as being long-term and without a whole lot of flexibility. Both of these ideas are actually false; CD terms are available for as short as 7-30 days, and with some creativity, you can add flexibility to your CD portfolio through something called laddering.

Laddering means structuring your money in several CDs, so that not all the money is one account. For example, if you have $10,000 in the bank, you might have four CDs total, one for six months, one for 12 months, one for 18 months, and one for 24 months, each with equal deposits of $2500.

This allows money to become available, say, once a year, while also taking advantage of accrued interest. Because the economy is still recovering, many folks may be “staying on the sidelines” with their cash, waiting for interest rates to rise. But those folks aren’t earning any interest on their funds. You can think of CD laddering as a way to hedge your bets.

There are several considerations with a CD ladder. As we have talked about, the rate climate is uncertain. Will interest rates climb, fall, or stay still? If rates do improve, for how long? Uncertainty is actually a good reason to ladder CDs. After all, FDIC insurance and staggered terms mean that you have safety in a CD ladder, plus you will at least be earning interest, even if it’s not the killer return that equities can provide during a bull market.

Another consideration is rate of return. Most CD laddering calculators will show that interest returned to the depositor will fluctuate less over time when a ladder is used. This makes sense; it is because a ladder reduces the chance of a big swing in rate on a larger deposit amount. Yet your bank may offer tiered interest rates, or a higher annual percentage yield on a CD that has a higher balance. Using our earlier example, those four $2500 CDs may only earn 1% each while combining them into one $10,000 certificate would get you 5%. You will want to know how your bank compounds interest (daily versus monthly for instance) and then compute the return against any advantage (or disadvantage) of tiered rate.

These days, everyone seems to be in a hurry. Once concern about a CD ladder is if you really want to take the time to manage it. Having all of you “rung” accounts at one institution can help, but this may not give you the best rate of return. No matter how you do it, a carefully planned ladder will require some research on the best rates and terms.

Finally, your own personal financial needs cannot be discounted when setting up a ladder. In other words, you may need access to cash for an emergency–such as the hot water tank in your house overflowing or a fender-bender in the parking lot. Planning a CD ladder should include a serious consideration of cash flow, or the likelihood that you will need to tap your savings to pay for expenses. After all, it is much cheaper to use cash on hand than it is to pay interest on a loan.

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