How to Create a CD Ladder
A CD ladder is a strategy that uses multiple CDs with different maturities. It lets you earn interest while having regular access to part of your savings.
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Certificates of deposit (CDs) can be a simple and safe way to save for short- and medium-term goals. Like savings accounts, the money in a CD can be FDIC-insured, and it offers guaranteed interest earnings — often with a higher interest rate than savings accounts.
The trade-off is that you have to lock up your savings in the CD. Withdraw the money early, and you might have to pay an early withdrawal penalty. These penalties might eat away all your gains, or even leave you in the red, so it's often best not to put money into a CD that you might need before it matures.
However, if you use a CD ladder, you might be able to open high-rate CDs today and guarantee regular access to part of your savings in the coming years.
What is a CD ladder?
A CD ladder is a savings strategy that involves buying multiple CDs with varying maturity dates.
Suppose you have $10,000 in your emergency fund that you want to put into a CD. Instead of opening one CD that matures in two years, you open four CDs that will mature in six months, one year, 18 months and 24 months. Now, you'll get $2,500 plus the interest that accrues, every six months.
The ladder can be helpful if an emergency or opportunity arrives and you want penalty-free access to some of the money. Or, if you don't need the money right now, you can use it to open a new CD and add the next rung to your ladder.
How to create a CD ladder
You can create a CD ladder on your own by opening several CDs with different maturity dates. And you can choose how you want to stagger the maturity dates based on the amount you're setting aside, your goals and the current interest rates.
If you want to optimize your earnings, you could look for CDs from different financial institutions to see which offers the highest interest rate for a particular yield. Or, if you prefer simplicity, you can open all your CDs with the same financial institution.
Some companies make it easy by offering tools that you can use to see what the ladder will look like and then quickly buy all the CDs. You might also be able to have the CDs automatically rollover or renew into a new CD. And mark your calendar for the maturity dates, because sometimes this will automatically happen if you don't close the CD.
Alternatives to CD ladders
A CD ladder isn't the only option if you're looking for safe places to keep your money. You could also look into:
- Penalty-free CDs: You can close a penalty-free CD early and take out all your money without paying any penalties. However, these CDs tend to have a lower starting rate than standard CDs.
- Bump-up CDs: With a bump-up CD, you can request an interest rate increase if the financial institution raises interest rates on CDs with the same term. These also tend to offer lower starting rates, but they can be a good option for long-term CDs if you think rates will rise.
- High-yield savings accounts and money market accounts: You get easy access to your money in a savings or money market account, although the interest rate can also change at any time. Still, some high-yield options offer similar or higher rates than many CDs. The main differences are that money market accounts tend to offer higher rates, have check writing privileges and higher account minimums.
You could also look into ways to invest your money if you're looking for even higher returns. But investing involves taking on more risk than saving, and it might not be a good idea to invest emergency or short-term savings.
Consider your options before opening a CD
Generally, longer-term CDs offer higher interest rates. And when that's the case, CD ladders provide a clear trade-off. You receive a lower overall return (compared to buying one long-term CD) but gain more frequent access to your money.
But that's not always the case. When there's an inverted yield curve, longer-term interest rates are lower than the short-term ones.
In these situations, only opening shorter-term CDs might seem like the best option — and it could be if CD rates stay the same or rise. But there's a risk. If interest rates fall, you'll soon have to buy new CDs at a lower rate.
With this in mind, it might still make sense to create a CD ladder with a mix of short- and longer-term CDs. Even if the longer-term ones offer a slightly lower rate, you lock in that rate for many months or years.
Consider these pros and cons when you're choosing if and how to create a CD ladder.
Good credit can also improve your options
Having a good FICO® Score can also be important. If you want to have regular access to money when you need it, a higher FICO Score can help you qualify for loans and lines of credit with more favorable terms and lower fees. Learn what affects your FICO Score, and get your FICO Score from FICO, for free. No credit card required.
Louis DeNicola is a finance writer based in Oakland, California. He specializes in consumer credit, personal finance, and small business finance, and loves helping people find ways to save money. In addition to FICO, Louis works with a variety of financial services firms, credit bureaus, and educational websites, including LendingTree, Credit Karma, and Experian.