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A certificate of deposit (CD) ladder is a savings strategy in which you buy multiple CDs with different term lengths. A CD’s term is how long you need to leave the money in the account. Laddering CDs with different terms lets you take advantage of high rates while maintaining access to your funds. Learn how CD ladders work, how to build one and their pros and cons.
How a CD Ladder Works
A CD ladder involves opening multiple CDs at the same time with different term lengths. Terms are usually between three months and five years and they are the amount of time you need to keep your money untouched in the CD. Banks will usually offer high rates on CDs with longer terms as an exchange for keeping your cash locked up.
Once the term is over, the CD has reached maturity and you can reinvest your funds (along with your newly earned interest) into a new CD, which is typically what you do when CD laddering. The idea is that you can invest some of your funds in short-term CDs to keep the money somewhat accessible, but also put money into longer-term CDs to get the advantage of high rates.
You can choose how much to deposit — as long as you hit the minimum deposit amount, which can be around $500 to $1,000 — and the term length. However, unlike other savings vehicles like a high-yield savings account, rates are set once you open your CD. During your CD’s term, your interest compounds and your funds grow.
Instead of having all your funds locked up in a long-term CD for years, the laddering technique allows you to split up your money into several CDs with different maturity dates. For example, you could open one 12-month CD, one 3-year CD and one 5-year CD. As each CD matures, you have access to your funds again. If you need cash, it’s available, and if you don’t, you can reinvest it into a new CD.
| Pro Tip |
| Those who don’t want to lock up their funds for years could consider a mini CD ladder instead. It’s the same concept as a regular CD ladder, but with shorter terms. For example, you could open a 3-month, 6-month and 12-month CD to build a mini CD ladder. |
How to Build a CD Ladder
The first step to building a CD ladder is deciding how much you want to put into a CD. Remember that with traditional CDs, which is the kind we’re talking about in this article, you’re committing to locking up your funds for a certain term length. You don’t want to put $10,000 in a CD ladder that includes 5-year CDs if you’ll need all $10,000 within three years.
You also don’t want to put too much into CDs, since investing in the financial markets has potential for higher returns. Your retirement savings, for example, should likely be invested in assets like stocks if you have decades until retirement — not put in CDs.
Then, you need to determine how often you want your CDs to mature and the money to become available. If you want to be able to access some of your money in the near term, perhaps you start with a 3-month CD. But if you know you won’t need the money for at least a year, you can opt for a 12-month CD.
Next, shop around and see which banks offer the best rates for CDs with long- and short-term maturity dates. Credit unions and smaller banks often offer higher rates than their traditional brick-and-mortar counterparts. While we’ve been discussing traditional CDs, you can also look for specific CD types that offer additional benefits. IRA CDs allow you to save for retirement via CDs with tax advantages, and no-penalty CDs allow you to withdraw money early without a penalty (but they typically have lower interest rates than traditional CDs).
Build your CD ladder to fit your savings needs and risk level. Let’s say you have $25,000 to build a CD ladder. You could spread your money out like this:
- $5,000 into a 6-month CD
- $5,000 into a 12-month CD
- $5,000 into a 3-year CD.
- $5,000 into a 4-year CD
- $5,000 into a 5-year CD.
Once each CD matures, you can reinvest your initial deposit and interest into another 5-year CD if you don’t need the cash. Keep in mind that your bank or credit union may roll over your CD automatically at the end of the term unless you specify not to. But the rates aren’t guaranteed to be the same once the term ends, so you may want to opt for a new CD.
Pros and Cons of CD Ladders
The main pro of CD ladders is that you can maintain access to some of your funds in the short term while taking advantage of higher rates. While many of the best rates on 12-month CDs are more than 5%, the national rate for traditional savings accounts is just 0.46%, according to a report from the FDIC.
CDs also come with protection for up to $250,000 of your funds per account as long as the institution offering the CD is insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA). Credit unions tend to call CDs “share certificates.”
But there are disadvantages to CD laddering too. The potential for growth is lower than if you invested the money in riskier assets, like stocks, and you can’t withdraw your money before the CD matures without facing a penalty (though there are exceptions, like with no-penalty CDs). You also need to be somewhat organized if you’re CD laddering on your own.
| Pros | Cons |
| Allows access to funds in the short term and the opportunity to take advantage of high rates of longer-term CDsCDs have higher interest than traditional savings accountsCDs are insured by up to $250,000 by the FDIC or NCUASome CDs come with additional benefits, like IRA CDs and no-penalty CDs | CDs don’t have as high a growth potential as riskier investments, like stocksRequires you to manage multiple accounts at onceYou can face a penalty if you tap into one of your CDs before they matureYou still can’t access your money until the first CD matures |
Sources:
Paul, T. (2024, February 28). Short-Term CDs Are Offering Higher Rates Than Long-Term CDs—Here’s How To Decide What’s Right for You. Retrieved from https://fortune.com/recommends/banking/short-term-cds-offering-higher-rates/
FDIC. (2024, February 20). National Rates and Rate Caps. Retrieved from https://www.fdic.gov/resources/bankers/national-rates/index.html
Consumer Financial Protection Bureau. (2020, August 27). What Is a Certificate of Deposit (CD) Rollover or Renewal? Retrieved from https://www.consumerfinance.gov/ask-cfpb/what-is-a-certificate-of-deposit-cd-rollover-or-renewal-en-923/
