What is a CD ladder?
A CD (certificate of deposit) ladder is a savings strategy that divides a lump sum into several CDs with staggered maturity dates.
This approach allows you to secure competitive annual percentage yields (APYs) across multiple CDs rather than placing all your funds in a single account. As each CD matures, you gain access to those funds, which you can reinvest in a new CD or use as needed. By spreading your money across different terms, a CD ladder provides both flexibility and consistent earning potential.
Let’s dive in and discover how a CD laddering strategy might fit your financial plans and help you reach your savings goals.
TOPICS COVERED
- What Is a CD Ladder?
- Back to the Basics: Understanding CDs
- The Advantages of Building A CD Ladder
- CD Laddering Example
- How To Build a CD Ladder
- Choosing the Right CD Ladder Strategy
Back To The Basics:
Understanding CDs
Let’s break it down. A certificate of deposit (CD) is a secure savings option that typically offers better interest rates than a standard savings account. The catch? Your money stays put until the CD reaches its set maturity date.
Typically, CDs have varying term limits which you can choose. The following are most common: 3 months, 6 months, 9 months, 1 year, 2 years, 3 years, 5 years. Some institutions may also offer less common options like ultra‑short terms (28 days), mid‑range (18 months or 4 years), or longer-term CDs up to 10 years. Call your bank or go on their website to see what’s available to you.
Also important to note – in general, longer-term CDs tend to offer higher interest rates than shorter-term CDs, although this can vary depending on market conditions and the bank’s policies.
When you open a CD with an FDIC-insured bank like Core Bank, your funds are protected—up to $250,000 per depositor, per bank, per ownership category. That means you can save with confidence, knowing your money is safe and working for you. There are many types of certificates of deposit (CDs), including jumbo CDs, bump-up CDs, and no-penalty CDs. When you are deciding which CD fits your needs, consider two things: your savings goals and how much access you want to your cash.
In this article, we’ll focus on how to use traditional CDs specifically to build a CD ladder.
TRADITIONAL CDS – A BRIEF OVERVIEW
Traditional CDs are the most common type of certificate of deposit, offering a fixed interest rate for a set term—usually ranging from a few months to several years. They require a relatively low minimum deposit, often around $500 to $1,000, and are ideal for savers who want predictable returns.
Unlike jumbo CDs, which demand very large deposits, traditional CDs are accessible to most people. They also differ from bump-up CDs, which allow rate increases, and no-penalty CDs, which let you withdraw early without fees.
With a traditional CD, your money is locked in until maturity unless you pay an early withdrawal penalty. This simplicity and stability make them a popular choice for conservative investors.
The Advantages of Building a CD Ladder
Instead of investing everything in one CD, you spread your money across multiple CDs with staggered maturity dates. This way, a portion of your funds becomes available each time a CD matures, giving you regular access to cash.
Why is this beneficial?
- It provides flexibility—you’re not stuck waiting years to access your money.
- It helps hedge against changing interest rates, since you’ll reinvest periodically at current rates.
- You can still take advantage of higher rates on longer-term CDs without committing your entire savings to one long-term CD.
a portion of your funds becomes available each time a CD matures, giving you regular access to cash
CD laddering Example
Imagine you have $10,000 to invest and want to build a CD ladder with increasing term lengths. Here’s how it might look:
- $2,000 in a 12-month CD at 4.00% APY → Earns about $80
- $2,000 in a 2-year CD at 4.10% APY → Earns about $164
- $2,000 in a 3-year CD at 4.20% APY → Earns about $252
- $2,000 in a 4-year CD at 4.30% APY → Earns about $344
- $2,000 in a 5-year CD at 4.40% APY → Earns about $440
Total estimated interest after 5 years if held to maturity: $1,280
When the 12-month CD matures, you reinvest that money into a new five-year CD. Over time, your ladder shifts toward longer-term CDs, which typically offer higher rates, while still giving you annual access to funds.
Note: APYs shown are for illustration only and may not reflect current rates.
Go Beyond the Basics
The above is a simple example, but CD ladders can be much more flexible. For instance, you could build a ladder using month-long CDs, so you have funds available every month instead of every year. This approach offers frequent liquidity while still earning interest.
How to build a CD ladder
Decide on Your Investment Amount
Start by determining how much you want to allocate to CDs. Be realistic—your money will be tied up for a period of time. While you’ll eventually regain access (plus interest), the amount you invest should never create financial strain.
Choose Your Ladder Structure
Next, decide how often you want CDs to mature and how many CDs you’ll include. A common approach is five CDs maturing annually, but you can design your ladder for more frequent access by using shorter terms. The key is balancing your total investment with the maturity intervals that fit your needs.
Start Building Your Ladder
Open your CDs and stagger their terms so they mature on a rolling basis—every year, every six months, whichever you choose. Ensure you’ll have periodic access to funds while earning competitive rates.
Maintain and Adjust
When a CD matures, you have options: reinvest into a longer-term CD to keep the ladder growing, or withdraw the funds if you need them. Each maturity date is an opportunity to adapt your strategy based on your financial goals.
Choosing the Right CD Ladder Strategy
There’s no single “best” CD ladder strategy. It depends on your goals and how often you’ll need access to your cash. Your approach should balance earning higher interest with maintaining enough liquidity for unexpected expenses.
Here are some general tips:
- If you don’t anticipate needing cash soon, a traditional ladder using longer-term CDs is a great starting point.
- If you expect to need funds regularly, consider laddering using shorter-term CDs for more frequent access.
- If you’re unsure, splitting your money between very short-term and long-term CDs might work best for you. This will give you both flexibility and higher yields.
No matter which strategy you choose, it’s important to plan for financial emergencies. Experts often recommend keeping three to six months of living expenses in an emergency fund. While you could use a CD ladder for this, remember that CDs restrict access until maturity. If that makes you uneasy, consider alternatives like a high-yield savings account or a no-penalty CD for your emergency fund.
In Summary
Building a CD ladder is a smart way to earn competitive interest while maintaining some liquidity. Whichever way you build your ladder, the key is aligning your plan with your financial goals and comfort level. Start simple, and as your needs evolve, you can adjust your ladder for more flexibility or higher returns.
