CD Ladders and How To Build Them

CDs (Certificates of Deposit) are a type of deposit account that offers a higher than usual interest rate (with 0 to low risk).

That’s why many people choose them as a part of their strategy to reach their financial goals.

CD issuers are typically banks and credit unions. Some brokerage firms also offer CDs, which are still issued by a bank but sold as brokered CDs.

Regardless of the issuer, they provide a solid personal finance tool, even if there are some disadvantages.

This article will look at a type of CD strategy called CD laddering and its various implementations.

In This Article

What Is a CD Ladder?

The biggest downside of a CD is that your money is locked in for the term. While terms usually start at just three months, the highest APY (Annual Percentage Yield) rates are typically reserved for longer-term CDs that are 5 or 7 years long.

With these long-term CDs, your money is locked for a relatively long time, which reduces its liquidity, making many people anxious.

CD ladders are the answer to this problem.

CD ladders are not a type of CD but rather a strategy you can use when investing in CDs. This strategy aims to balance the high APY interest rates typically associated with long-term CDs and access to your money.

In a nutshell, laddering is the practice of opening several CDs with different terms so that at any point in time, a CD is set to be maturing soon.

Having several CDs with different maturity dates can alleviate some of the anxiety associated with having all of your savings tied in a CD for the next five or so years.

Different maturity dates allow you to take advantage of high CD rates while avoiding early withdrawal penalties, should you need quick access to your money.

Pros & Cons of CD Ladders

Pros:

  • Get high APY rates
  • Regular access to funds
  • Guaranteed rate of return

Cons:

  • Requires time to set up
  • You will only get access to a percentage of your money.

CD Ladder Strategies

There are two laddering strategies that you need to know about: long-term laddering and short-term laddering. They both work in the same way, with the only difference being time scales.

Long-Term Laddering

With long-term laddering, you get access to some of the highest APY rates on offer at the expense of more frequent access to money.

With long-term cd ladders, you get access to your funds once a year.

How Long-Term Laddering Works

With long-term CD ladders, you get access to ⅕ of your money every year. You start by dividing your money into five equal parts to be invested in CDs as follows:

  • ⅕ of your money in a one-year CD
  • ⅕ of your money in a two-year CD
  • ⅕ of your money in a three-year CD
  • ⅕ of your money in a four-year CD
  • ⅕ of your money in a five-year CD

The one-year CD will expire first, at which point you can either withdraw the money or convert it into a new five-year CD.

Do keep in mind that you are breaking one step of the CD ladder if you cash out, but we will worry about this later.

If you don’t need to withdraw any of the money, you can convert all of the expiring CDs into 5-year term CDs.

Since these are done in different years, they will expire on different years, essentially one a year.

That means you get access to the money in one of the CDs every year (because it will expire in that time frame).

Pros & Cons of Long-Term Laddering

Pros:
  • It can help you get higher APY rates.
Cons:
  • You get access to money once a year.

Short-Term Laddering

With short-term laddering, you get frequent access to money, once every three months or so, at the expense of earning higher interest rates.

Short-term CD ladders work just like the long-term ones. However, they expire every three months rather than one year.

As we said earlier, you will get a lower APY rate since the terms we are aiming for are just one year long instead of five years, but on the upside, you’ll get more regular access to money.

How Short-Term Laddering Works

To build short-term CD ladders, start by diving the capital that you want to invest into four equal parts to be invested in CDs as follows:

  • ¼ of your money in a 3-month CD
  • ¼ of your money in a 6-month CD
  • ¼ of your money in a 9-month CD
  • ¼ of your money in a 12-month (1 year) CD

The three-month CD will expire first, at which point you can either withdraw the money or convert it into a one-year CD.

However, to keep the ladder going, you will need to convert each CD that expires into a one-year term CD.

This way, every three months, you have a one-year CD that’s expiring, providing you with regular access to money.

Pros & Cons of Short Term Laddering

Pros:
  • You get access to money once every three months.
Cons:
  • APY rate is relatively low when compared to long-term CD ladders.

How To Build a CD Ladder

Building a CD ladder can be fun, even if slightly time-consuming to set up.

Even so, it can provide you with an excellent savings strategy that offers a healthy rate of return on your savings.

Step 1: Decide your budget.

The first step you need to take is deciding how much money you can invest in the CD ladder, focusing on how much money you can or are willing to save up.

Keep in mind that you will have regular access to between ¼ to ⅕ of the total sum that you invest. Of course, you can also opt to build your own custom schedule.

Step 2: Decide how often you want access to money.

The next step is to decide how often you want access to money. The minimum period available is about three months, which gives you access to money at more regular intervals at the expense of better rates.

You can also opt to have yearly access when using the long-term CD ladder unless you decide to opt for a more custom approach.

Step 3: Divide the budget.

Now that you know how much money you can save and how often you would access money, you can start building the ladder.

You need to divide the budget equally across all CDs with the staggered maturity dates.

Step 4: Find the highest interest rates for each CD.

Different banks and credit unions offer different rates for different terms. One financial institution might offer a high APY rate for its 2-year term CD, while another will offer a better rate on shorter-term CDs.

To get the most out of CD laddering, find the best rates for high-yield CDs for the longest-term CD since this is where all your CDs will eventually reside.

Step 5: Open the CDs

Once you’ve made your decisions, it is time to open the CDs and execute your CD ladder strategy.

Designing Your Own CD Ladders

Short-term CD ladders utilize the shortest timeframe possible (3 months). In contrast, long-term CD ladders utilize the longest timeframe possible (1 year).

But nothing is stopping you from designing your own ladders to suit your financial needs.

For example, you can easily adapt the short-term CD ladder to 3 CDs that expire every six months. You could do this by dividing the sum that you want to invest into three equal parts and investing it into 6-month, 9-month, and 12-month CDs.

The most important thing to focus on is how frequently you want potential access to your money without having to pay any fees. Use this as your base CD, and then work your way up.

One other thing to be mindful of is that many banks and credit unions offer higher APY rates longer. Some will also offer higher rates on larger deposits.

Because of this, you might be better off working on a custom strategy that considers the rates available at the bank or credit union where you want to open your CD.

You might also want to consider opening different CDs with different financial institutions.

Banks and credit unions might offer more advantageous rates on specific terms. That means you might make more money by choosing the bank or credit union that offers the best rate for each step of the ladder.

CD Ladder FAQs

What is a CD ladder strategy?

As mentioned above, a CD ladder strategy is essentially a strategic way to invest in CDs. A CD ladder consists of CDs with staggered maturity dates to maximize returns.

The strategy helps you take advantage of the high APY interest rates typically associated with long-term CDs while also accessing your money more easily.

As you now know, there are two main laddering strategies: short-term laddering and long-term laddering. The only difference between the two is time scales.

Are CD ladders a good investment?

CD ladders are definitely a good (and smart) investment. You get to take advantage of some of the best APY rates and can get your hands on your cash penalty-free.

But whether they’re suitable for you or not will largely depend on your situation and your financial goals. Compared to a savings account, a CD can give you much higher interest rates while keeping your money protected.

Like all deposit accounts, CDs are insured by the FDIC (Federal Deposit Insurance Corporation) or NCUA (National Credit Union Administration).

Depending on your opt-for strategy, you might also want to check the APY rates offered on a high yield savings account. A CD ladder works best as a long-term investment, with each maturing CD automatically reinvested.

To get the most out of CD ladders, you might want to look at getting a 5 or 7 year CD ladder with several high-yield CDs. The only downside here is that these CDs require hefty deposits, sometimes north of $100,000, as is the case with Jumbo CDs. Either way, it can be a great addition to your portfolio.

How much can you make with a CD ladder?

How much you make using a CD ladder strategy will depend on your strategy and the amount of money you’re willing to invest.

Many banks offer CD ladder calculators, which can help estimate how much money you could make.

You can enter your deposit amount, your Minimum CD term, and Maximum CD term – and it’ll tell you how much you can expect to have at the end of the term.

What if I need to withdraw the money?

Once CDs reach their maturity date, you can either withdraw the money, let them roll over, or reinvest them.

If you want to build your ladder, you need to reinvest the money, remembering to choose the 5-year CD term option to keep the ladder going.

If you want to withdraw the money, most banks and credit unions will give you a grace period through which you can withdraw the funds.

What is a CD?

A CD (Certificate of Deposit) is a type of savings account offered by banks and credit unions in which you save your money for a fixed term. To do this, when opening a CD, you must choose the sum you want to deposit as well as the term.

The money is locked in the account for the term that you choose. While you technically may withdraw the funds before the end of it, this comes with a hefty penalty, and it might even cause you to lose money.

In return for locking your money in a CD for the term, you can expect to earn a higher interest rate than what a savings or checking account offers.

How much you’ll earn depends on the APY rate, which means that interest will compound over the term and make CDs so attractive.

On top of that, CDs are a very safe place for your money since they offer high rates without the risk associated with other investment options (like stocks, bonds, funds, and forex).

Can you get rich off CDs?

While CDs are a fantastic option for growing your money, let’s be realistic – you’re unlikely to get rich by investing in them alone.

That said, don’t let that discourage you – CDs are an excellent low-risk investment option if you want to see your funds grow over time.