What Is a CD Ladder? What You Need To Know

Commitment to Our Readers

GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.

20 Years
Helping You Live Richer

Reviewed
by Experts

Trusted by
Millions of Readers

Personal finance can be an all-encompassing concept, but really it just boils down to how you want to save and invest your money. Investing in a certificate of deposit might be right for you if you’re risk-averse, as it’s a safe way to grow your money — if you’re willing to leave it in the bank until it matures.

Keep in mind, however, that the safer the investment is, the lower its return will be. One way to maximize the return on your CD investment is to build a CD ladder.

What Is a CD Ladder?

CD laddering involves investing in a series of CD accounts and setting each one to mature at a different time, which gives you periodic access to some of your money in an account different from a checking account or in savings, while the rest of it keeps earning interest. Each time one of your CDs matures, you have the option to withdraw the money or roll it into another CD and extend the ladder.

A CD ladder is a way to make the most of CDs and earn a higher overall return on your savings, while maintaining the ability to access your money more frequently.

Why CD Ladders Are Effective

The problem with placing your money into a CD is that you will generally need to set it aside untouched for the duration of the term. The good news is that your investment is safe and FDIC-insured, so you don’t have to worry about losing the principal. The bad news is that the money typically can’t be accessed before the term is up without a penalty.

A CD ladder can boost your cash flow by strategically allocating certain amounts to CDs with different maturity dates. As time passes, you will earn interest on your CDs while the different maturity dates on your funds make your cash available in increments. Depending on your current cash flow situation, you can cash out a particular CD when it’s available to spend, or you can roll it into another CD term to continue earning a set interest rate.

That regular access to your money makes CD ladders a good alternative to high-yield savings accounts, which can earn similar annual percentage yields with fewer restrictions on withdrawals.

How a CD Ladder Works

Creating a CD ladder is an effective way to invest your money at a higher rate without compromising your funds’ safety. When you create a CD ladder, you should take into account the following factors:

• CD maturity dates
• CD rates
• The amount you want to invest in your CDs
• Shorter-term CDs vs. longer-term CDs
• Early withdrawal penalties

Your CDs’ maturity dates determine when you’ll have access to your money. For example, say you put your money in five CDs. The first CD expires in one year, the second in two years and so on, up to five years. When the one-year CD matures, you can reinvest the money in a new five-year CD — and you can continue doing that with each account that has reached its maturity.

Make your money work for you

Get the latest news on investing, money, and more with our free newsletter.

Submit

By subscribing, you agree to our Terms of Use and Privacy Policy. Unsubscribe at any time.

Thanks!

You're now subscribed to our newsletter. Check your inbox for more details.

In addition to picking your CD maturity dates, you’ll want to choose the combination of term lengths best suited to your goals.

For example, 12-month CDs currently have the highest APYs, on average, followed by 24-month terms. But while a 60-month CD earns lower rates, it also guarantees that rate for five years, which will work in your favor if rates decline. And the shortest terms, which typically earn the lowest rates, let you take out your money sooner or reinvest sooner to take advantage of rising rates.

The amount you want to invest determines how much money you’ll put in each CD in your ladder. So, if you have $25,000 to invest in a CD ladder, you can invest $5,000 in five different CDs.

How To Ladder CDs

This example illustrates how to invest $25,000 in a five-year ladder:

1. Open five CDs with $5,000 each and make sure the accounts’ ascending maturities are 12 months apart: 12 months, 24 months, 36 months, 48 months and 60 months, for example.
2. When the 12-month CD matures, you can take out your money or renew it into a new five-year CD.
3. A year later, when the 24-month CD matures, you have the same options.
4. Continue this way until the 60-month CD matures.

Assuming you renew each expiring CD into new five-year CD, you’ll have all five-year CDs after five years. But their maturity dates will be staggered, so despite the longer terms, you still have access to your money once a year.

Your ladder doesn’t have to include five CDs or have maturities extending out five years. In fact, you can earn higher rates with shorter term ladders that include just four CDs. Fidelity provides model ladders to give investors ideas for building their own:

• One-year, four-CD ladder with maturities of three, six, nine and 12 months. If you renew each CD into a 12-month CD, after four years you’ll have all 12-month CDs, but you’ll be able to take out some money once every three months.
• Two-year, four-CD ladder with maturities of six, 12, 18 and 24 months. If you renew each maturing CD into a new 24-month CD, after for years you’ll have all 24-month CDs, but the maturity dates will be staggered to give you access to your money every six months.

Is CD Laddering a Good Idea?

A CD ladder is a good idea because it reduces the risk of the two downsides usually associated with CDs: the interest rate risk and low liquidity.

CD laddering offers several advantages that make the strategy appealing to investors. For example:

• CDs typically have higher rates of return than savings accounts.
• Not all of your money is invested at the same low rate if you ladder your CDs.
• CD laddering involves opening CDs of varying term lengths and renewing shorter-term CDs for longer-term CDs.
• You can set up some short-term CDs to gain more frequent access to your money in case you need cash in hand.
• If you invest during an economic slump, you can get higher interest rates as the economy improves.

However, CD ladders also have a couple of disadvantages to consider:

• You’ll have to keep track of maturity dates to keep maturing CDs from automatically renewing at the current rate.
• CDs’ low risk means the potential gains are also low compared to non-bank investments like stocks.
• If you open the bank accounts at a financial institution that has a high minimum deposit for new CDs, you could wind up putting money into CDs that would work better for you invested elsewhere.

Considerations for Your CD Ladder Strategy

When it comes to building a CD ladder, keep it simple. Here are some tips that might help you build yours:

• Have a plan: Write down what you want to do with your savings and when you’ll need access to the money. Your access needs will determine how many CDs you invest in and how long their terms should be.
• Stay organized: Invest in your ladder CDs with the same bank. If they’re in one place and tied to one savings account, it will be easier to keep them organized.
• Set goals for your ladder: Choose maturities that are one, two or even five years out if you want to keep it simple. Any earlier maturity dates will require you to purchase a new CD every three to six months to keep your ladder in place. However, in the current rate environment, ladders with short terms might yield higher rates.

Final Take

With CD laddering, investors utilize a strategy that divides a sum of money into equal amounts and invests them in CDs with different maturity dates. This strategy decreases interest rates and reinvestment risks, and helps you earn greater returns on your CD investments. It also enables you to access some of your money periodically, which makes this a win-win financial strategy.

Compared to a checking account, which is highly liquid but usually earns low or no interest, and a traditional savings account that gives you more access but also earns low rates, a CD is an excellent choice for anyone who wants good yields at little ris

Taking full advantage of your CD investment options and laddering strategies will likely enhance your returns over time, so if you want to make your cash work harder for you, consider adding this technique to your financial playbook.

Explore More on CD Accounts

• Certificate of Deposit (CD): What It Is and Whether It’s Right for You
• How To Open a CD Account in 4 Simple Steps
• How Do CDs Work? Start Stacking Your Savings
• How Much Money Should You Keep in a CD Account?
• Pros and Cons of CD Accounts
• Best CD Accounts

Daria Uhlig and Caitlyn Moorhead contributed to the reporting for this article.

Share This Article: