What Is a CD Ladder?

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Investing in a certificate of deposit might be right for you if you’re risk-averse — 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. But there’s another option.

Enter the CD ladder, a way to make the most of CDs and earn a higher overall return on your savings. CD laddering involves investing in a series of CDs and setting each one to mature at a different time, which gives you periodic access to some of your money while the rest of it keeps earning interest, giving you the option to keep the money or roll it into another CD and extend the ladder. 

Keep reading to find out how CD laddering works and how you can maximize your earnings with one. 

What Is a CD Ladder?

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 interest rates
  • The amount you want to invest in your CDs
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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. 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. 

In addition to picking your CD maturity dates, you’ll want to choose CDs with the highest interest rates. In general, long-term CDs offer higher interest rates than short-term CDs.

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.

what is a cd ladder

How To Ladder CDs

Building a CD ladder is straightforward. Follow this example, which illustrates how to invest $25,000 in a five-year ladder:

  • Open five CDs with $5,000 each — and make sure the accounts’ ascending maturities are 12 months apart. This way, you’ll have access to some of your money every 12 months as your CDs come to term — and you’ll have the interest-earning power of the longer-term CDs.
  • When each of your CDs reaches its maturity, you can take your money out or renew it into a new five-year CD to extend your ladder. Once all the original CDs have been renewed, the ladder works automatically.
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How a CD Laddering Strategy Can Boost Your Cash Flow

The problem with placing your money into a CD is 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.

Pros and Cons of CD Laddering

There aren’t really any cons to building a CD ladder. By using this laddering technique, you are avoiding 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. Consider these perks: 

  • 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.
  • Long-time laddered investments have higher yields than shorter ones.
  • 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.
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The last point is important: Although interest rates on deposit accounts — including CDs and savings accounts — are currently low, those interest rates might go up soon. If one CD matures during a time when your bank is increasing interest rates, you can put your earnings from that CD into a new CD with the highest interest rate.

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:

  • 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.
  • 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.
  • If you’re planning on laddering, choose maturities that are one, two or even five years out. Any earlier maturity dates will require you to purchase a new CD every three to six months to keep your ladder in place.

Is CD Laddering Worth It?

As you now know, CD laddering can help you earn greater returns on your CD investments and enable you to access some of your money periodically, which makes this a win-win financial strategy. Taking full advantage of your CD investment options — including 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.

Cynthia Bowman contributed to the reporting for this article.

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About the Author

Barri Segal has 20+ years of experience in the publishing and advertising industries, writing and editing for all styles, genres, mediums, and audiences. She has been writing on personal finance topics for 12 years and gains great satisfaction from making a difference in consumers’ lives.
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