How to Build a CD Ladder


Storing away your money in a savings account is a great strategy when you first start saving. However, if you want to grow your interest more aggressively, what should you do?

One option is to build a CD ladder. This savings technique takes advantage of some of the best parts of a certificate of deposit (CD) while helping you sidestep some of their traditional pitfalls.

cd laddering

Of course, there are some inherent risks involved, but they are modest compared to other investment options. Learn what a CD ladder is and how you can utilize it to your advantage.

What is a CD?

Short for certificate of deposit, a CD is a savings certificate that has a fixed interest rate along with a fixed maturity date. That means you can’t pull out your money before the specified time without getting penalized.

So, it’s not meant to be your emergency savings fund — CDs are longer-term savings tools. Maturity dates are usually set anywhere between three months and five years.

CDs do come with certain benefits:

Oftentimes, CDs have a higher rate of return than a standard savings account because your money isn’t as liquid. If you commit to long-term CDs, you typically get a higher interest rate. This isn’t always the case these days since interest rates are extraordinarily low across the board. So, before you totally jump onto the CD bandwagon, do some shopping around.

You may be able to find strong rates at different financial institutions. So, it’s wise to compare the best CD rates on the market. Don’t just assume that the bank or credit union you have your checking account with is the only option. There are plenty of other banks and credit unions — including online ones — that offer competitive CD rates.

What is a CD ladder?

You certainly could just drop some cash into a CD and walk away from it for a few years. However, a CD ladder is a technique that uses the structure of multiple CDs to maximize both your earnings and your liquidity.

Here’s the basic premise:

Rather than putting your money into one large, long-term CD, you instead stagger your cash over multiple CDs of varying term lengths. The CDs mature at varying intervals, so you frequently have the opportunity to withdraw the cash penalty-free or reinvest it into a new CD.

CD ladders address some of the most common concerns with using this type of savings vehicle. It keeps your money relatively liquid because you’ve always got a maturity date on the near horizon. CD ladders also allow you to maximize better interest rates while avoiding early withdrawal penalties.

Like any savings strategy, there are both pros and cons involved. We’ll take you through more of the benefits, along with some examples of how exactly CD laddering can work for you. Then, we’ll highlight potential drawbacks so you can determine if this plan is right for you.

What are the benefits of building a CD ladder?

First and foremost, just like a traditional savings account, all of your money placed in a CD is FDIC insured. That makes it a low-risk investment in which to place your funds. Plus, depending on how exactly you stagger your CDs, you can keep your money fairly liquid depending on how you stagger them.

On top of that, choosing the best CDs can help you take advantage of higher rates. This is particularly true after you get your CD ladder set up because you can eventually structure it so that you’re only purchasing longer-term CDs. Those typically come with the best rates because the bank gets to keep your capital for longer.

You also get to mitigate risks whether interest rates rise or fall:

With a CD ladder, you’ll have more cash available. This allows you to move your money into a new savings vehicle if interest rates increase. However, if rates drop, your current investments will be secure for up to five years with a fixed-rate CD. Overall, CD ladders can help hedge against the risks of both scenarios, so it could be worth considering as part of your savings plan.

Common CD Ladder Structures

You can build a CD ladder in any number of ways. We’ll give you a few examples, but also remember to factor in your own financial needs over the next few years. Depending on your savings goals, you may be able to implement a CD ladder right away or you might need to tweak your investments.

Classic CD Ladder

The most common type of CD ladder is a straightforward staggering of CDs. You can start by picking CDs of different lengths, with each one a year apart. Then, as the earliest one matures, you reinvest that into a longer-term CD that matures one year after your longest one.

Take a look at how this works in action:

In this example, let’s say you have $5,000 to put towards CD savings. Place your first $1,000 in a one-year CD. Then, spread out the rest in increasing one-year increments. So, the CD ladder looks like this:

One-year CD: $1,000

Two-year CD: $1,000

Three-year CD: $1,000

Four-year CD: $1,000

Five-year CD: $1,000

When the one-year CD matures in a year, you can invest it in another five-year CD (because the original five-year CD only has two years left at this point). If you continue doing this every year, you’ll eventually be investing in the longer-term accounts, but with one CD maturing every year.

What happens if you need the cash?

You can absolutely tap into your CD ladder when one comes due. In a worst-case scenario, you’d need to wait just shy of a year to get access to your money if you reinvested and suddenly needed cash. So, this money isn’t for short-term emergencies.

But if you’re planning a major purchase or even out of work for a while, you know that you have guaranteed money becoming available on a predetermined date. It can be an ideal way to maximize interest earnings while not tying up your money for too long.

Staggering Purchases

Rather than purchasing all of your CDs at once, you can also buy the same term CD at certain intervals. For example, you could buy one two-year CD every six months.

In this scenario, you increase the frequency of your maturing CDs to twice a year. This keeps your money more liquid (once that first CD matures), and you also don’t have to worry about having all that cash up front. Instead, you can pick an amount that feels doable every six months and invest as you save.

Economic Forecasting

Alternatively, you can keep your CD ladder a little less structured and instead keep a continued eye on economic conditions to make your allocations.

This really isn’t as complicated as it seems.

If you notice that interest rates start to increase, you can reinvest your maturing CDs into shorter-term CDs. That way, you’re not locked into a low-interest account for five more years when a normal liquid savings account is starting to earn more interest.

On the flip side, if you see interest rates going down again, you can keep putting money into longer-term CDs that pay the best annual percentage yield (APY). Then, you get a longer guarantee of the current rates before they drop any further.

Like any economic forecasting, there’s plenty of room for error. The best way to protect yourself is to diversify your portfolio and never put all your eggs in one basket.

You can never truly predict what will happen with the economy. You also can’t predict what will happen in your own life. So, you can’t solely rely on chasing rates as your financial savvy. You also have to incorporate plenty of flexibility to cover yourself in numerous potential scenarios.

Are there any drawbacks to setting up a CD ladder?

There are certainly a few drawbacks that come with CD ladders, although some may or may not be important to you. Obviously, there’s still a degree of illiquidity, depending on how you structure your CD ladder’s maturity dates.

Additionally, if you’re stuck in a low-interest CD for a longer period of time, you could be subject to inflation risk. So, if inflation increases while your money is held, but your savings rate is fixed at a lower amount, your money may not actually be worth more than what you started with. Yes, you’ll receive the right dollar amount back, but it might not have the same purchasing power as it did five years ago.

Is a CD ladder right for you?

There are a few things to consider when thinking about whether to build a CD ladder. First, take a look at your overall savings. Do you have an accessible emergency fund of at least $500? Do you have three to six months of expenses set aside as well?

If not, then keep saving towards these basic goals. However, if your answer is yes, a CD ladder could work well for you.

You can certainly follow one of the strategies we talked about earlier: stacking CDs to reach annual maturities each year or reinvesting based on interest rate expectations.

But you can also create a CD ladder strategy based on your own timeline.

For example, do you plan to go to graduate school in a few years? You could space out CDs to mature at different intervals that help with your tuition payments or living expenses.

Final Thoughts

Don’t forget to look carefully at interest rates. Savings account yields are rock-bottom, so you may not earn any more in a CD than in a more liquid account. This is especially true if you have higher dollar amounts available to invest.

Do your due diligence by looking at all savings types you’re eligible for, not just CDs. You may be better off with a high yield savings account for now. Then, as rates begin to rise, you may find you can then get a better deal with a CD.

There’s no one-size-fits-all financial solution, particularly when it comes to savings. You can always test out a CD ladder with smaller amounts. Then, invest more as your earlier certificates begin to mature. The key is to create a CD laddering strategy that optimizes earnings and liquidity for your specific needs.

Lauren Ward
Meet the author

Lauren is a personal finance writer who strives to equip readers with the knowledge to achieve their financial objectives. She has over a decade of experience and a Bachelor's degree in Japanese from Georgetown University.