How to Save Smart With A Certificate of Deposit Ladder


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A Certificate of deposit is issued by a bank to individuals looking to invest for a specified duration of time at a certain interest rate. 

Certificates of Deposit (CDs) are some of the highest-yielding deposit accounts offered by banks and SACCOs. CDs lock away your money for a certain period of time and usually can’t be unlocked without attracting a penalty for early withdrawals. CD interest rates vary with length and amount committed – longer terms and higher amounts, attract higher interest rates. People usually use CDs to build emergency funds, save for retirement or just hold cash temporarily.

A Certificate of Deposit (CD) ladder is a saving strategy, where you structure a series of several CDs with varying terms. The goal is to spread the terms to ensure that the CDs finish their terms at regular and predictable intervals. This way, you can get access to a steady stream of cash while still earning higher rates than you would through a regular savings account.

Here is how to save smart using certificates of deposit:

  1. Open as many separate CDs as needed that align with your goals.
  2. Each time, when one CD matures, renew it and convert it into a longer-term Certificate of Deposit, say 5 years.
  3. Or, decide if you want to pull the money out or reinvest it upon maturity.

Traditional CD Ladder Model

The traditional CD ladder model separates your investments evenly over a period of five years, maturing year after year.

For example, if you had KES 1M, you’d spread your money as follows:

AmountCD Range of TermPossible Interest Rate*Upon Maturity
KES 200,000One-Year CD7.5%KES 215,000
KES 200,000Two-Year CD7.5%KES 231,125
KES 200,000Three-Year CD7.5%KES 248,459
KES 200,000Four-Year CD7.5%KES 267,094
KES 200,000Five-Year CD7.5%KES 287,126

*Note: Banks usually provide higher interest rates for longer durations and higher amounts deposited. Interest rates for CDs in Kenya vary between 6.5% to 10% per annum.

Upon maturity of the CDs, the amount can then spent or reinvested in another five year CD as illustrated below:

Today you buy a…At maturity in..1 Year, 2 Year, 3 Year, 4 Year and 5 Year …
Initial CD1st Rollover2nd Rollover
One -Year CDSpend or reinvest in another five-year CD5 -Yr CD
Two-Year CDSpend or re-invest in another five-year CD5-Yr CD
Three-Year CDSpend or re-invest in another five-year CD5-Yr CD
Four-Year CDSpend or re-invest in another five-year CD5-Yr CD
Five-Year CDSpend or re-invest in another five-year CD

Advantages of a CD Ladder

The following are the main advantages of saving using the CD ladder strategy:

⊕ Allows more access to funds stashed away in a Certificate of Deposit.

⊕ Allows you to take advantage of higher interest rates by saving on varying lengths of time.

⊕ Enables flexibility to split up your investment.

⊕ A great way to keep you disciplined – penalties for early withdrawal will surely deter you from digging into your savings.

 Disadvantages of a CD Ladder

The following are the main disadvantages of saving using the CD ladder strategy:

⊗ Your money is locked away for certain lengths of time.

⊗ Your savings are still subject to the risk of interest rates rising and falling.

⊗ A penalty for early withdrawals is applicable – sometimes maybe three to six months worth of interest, although some banks actually charge more than this.

How CDs Stacked-up Against Common Options

CDs ladders are one of the numerous choices you can make with your savings. Compared to other common options, here is how CDs perform in a theoretical example where we invest KES 1M for 10 years in a five-year, five CD ladder, stock market, high yield savings account or simply keeping cash in a non-interest earning account.

Investment OptionPotential Rate of ReturnRiskReward
Five-Year, Five CD Ladder7.5%Low, insured by KDIC up to KES 100,000KES 2,061,158
Stock Market15% (NSE 20 share index return in 2016-2017)Very HighKES 4,045,558
High-Yield Savings Account8.5%Low, insured by KDIC up to KES 100,000KES 2,261,131
Simply Keeping Cash – 5.7%Very Unsafe, inflation erodes the valueKES 556,054

Why Create A CD Ladder?

Depending on your own individual situation – values and goals – CD ladders can be quite beneficial. When considering to create a CD ladder for your savings, there are four things that you need to keep in mind:

(1) Liquidity – determine how often you want access to your cash.

(2) Yield – get the best yield in the market for your CDs

(3) Timing/Time Frame – determine how long you want to invest for or at what point in time do you want your CD to mature.

(4) Complexity – determine how simple or complex you want to structure your CDs and how much work you want to put into it.

In truth, CDs don’t earn as much as they used to before the interest rate cap that was introduced in 2016. Today the rates for CDs are ranging from 7.0% -10%, depending on the duration and amount invested – quite a huge difference! Because of this, almost all CDs except the longer term, higher amount CDs typically earn less than most high yield savings account. However, most banks do offer the option to negotiate rates – so if you have a large sum of cash, you can do that.

Currently, banks are offering yields as high as 8.5% on high-yield savings accounts – just under the current average interest rate for a five-year CDs (9.0 -9.5%, with amounts higher than KES 1M). Therefore, if you are holding a certificate of deposit for anything other than for a  long-term strategy, then CDs may not be worth the hustle when compared to high-yield savings accounts.

What’s Next?

Before committing large sums of money in Certificates of Deposit, ensure that you get the best rates in the market. Also, when building your CD ladder, keep in mind that CDs have varying rates of return which can be low, therefore manage your expectations accordingly.

Image credits: Top, by Negative Space via Pexels

Meanwhile, You can click on the following links to read more about financial planning:

Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.

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Irene Makanga
Irene has an MBA in Finance and is an avid businesswoman, passionate about financial literacy.


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