Why It’s Smart to Ladder Your CD Accounts

Maximize your earnings with a CD ladder.

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 extending the ladder.

Find out what a CD ladder is and how you can maximize your earnings with one. Decide if this strategy works for your financial plan and then do your homework to find the best CD accounts.

What Is a CD Ladder?

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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

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 roll it into the longest-term 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 obviously want to choose CDs with the highest interest rates. In general, long-term CDs offer a higher interest rate 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.

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Related: Find Higher CD Interest Rates Now

How to Ladder CDs

Building a CD ladder is straightforward. Follow this CD ladder example that illustrates a $25,000 investment for 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 your 12-month month CD matures, you can take your money out or renew the CD to keep your ladder going. Once all the original CDs have been renewed, the ladder works automatically.

Learn: 6 Tips for Choosing a CD Account

CD Laddering Pros and Cons

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 their low liquidity.

“The trick to [creating a CD ladder] effectively is to pick the right spacing of the rungs and the right overall length of the ladder for your particular situation, taking into account the interest rate environment at the time you’re building the ladder,” said Scott Halliwell, a USAA Certified Financial Planner. “It’s also important not to extend the ladder too far out so that you miss out too much if interest rates start to increase while the ladder’s in place.”

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CD laddering offers several advantages that make the strategy appealing to investors. Consider these perks:

  • CDs 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.

The last point is important: Although interest rates on deposit accounts — including CDs and high yield 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.

Related: Things to Know About High-Yield CDs

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:

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  1. 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 buy and how long their terms should be.
  2. Invest in your ladder CDs with the same bank, because it will be easier to keep them organized if they’re in one place and tied to one savings account.
  3. 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.

CD Laddering Is a Smart Move

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.

Up Next: Here Are the Highest CD Rates in Every State

About the Author

Barri Segal

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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