What Is a CD Ladder? What You Need To Know

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. So if you are looking to open a CD account, knowing what you’re investing in is a good place to start.

What Is a CD Ladder?

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. 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.

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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.

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.

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In addition to picking your CD maturity dates, you’ll want to choose CDs with the highest interest rates or multiple CDs for higher returns. 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.

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:

  1. 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.
  2. 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.

What To Know About CD Laddering

There aren’t really any major cons to building a CD ladder. By using this laddering technique, you are reducing 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. Here are some key things to know:

  • 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.
  • 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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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.
  • Keep it simple: 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.

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, as well as helping 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.

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.

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Here are the answers to some common questions about CDs and CD ladders.
  • Is CD laddering worth it?
    • Yes, CD laddering is worth it as long as you can commit to keeping your funds locked into the account for the length of each term.
    • CD laddering can help you earn higher returns on your investment, as well as offering you periodic access to some of your money.
  • What is a CD ladder strategy?
    • A CD ladder can boost your cash flow by strategically allocating certain amounts of money 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.
  • How much does a $10,000 CD make in a year?
    • Term length, interest rate and other conditions all play into how much a $10,000 CD would make in a year. A CD with a term length of one year and an APR of 2.50% would earn around $266.29 in interest.
    • You can be your own CD ladder calculator by following this formula for calculating your CD value:
    • A = P(1+r/n)(nt)
      • A is the total that your CD will be worth at the end of the term, including the amount you put in.
      • P is the principal, or the amount you deposited when you bought the CD.
      • R is the rate, or annual interest rate, expressed as a decimal. If the interest rate is 2.50% APY, r is 0.0250.
      • n is the number of times that interest is compounded every year. Most CDs pay interest that is compounded daily, so n = 365. Check with your bank to verify the interest is compounded daily.
      • t is time, or the number of years until the maturity date.
  • How many CDs are in a CD ladder?
    • You can choose the number of CDs you'd like to include in your CD ladder based on your needs and cash available to deposit. If you're planning for an expense farther in the future, you could ladder five CDs, with the longest term at five years. Or, if you know you're going to need the cash sooner than that, you could open a ladder with three CDs with the longest term being three years, or less.
    • You'll also want to consider how many CDs you have minimum deposits for. If you have $2,500 to invest, you could open five CDs with minimum deposits at $500 each, but if the bank you choose requires a $1,000 minimum deposit, you'd only have enough for two CDs in your ladder – at least to start.

Caitlyn Moorhead contributed to the reporting for this article.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

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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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