The Ultimate Guide to CD Laddering
A certificate of deposit (CD) is a savings instrument that ensures growth through a guaranteed rate of return. Typically, these accounts have a higher annual percentage yield (APYs) than other options. The funds deposited in CDs remain locked throughout the CD’s term. One way of maximizing the benefits of these accounts is through CD laddering —or investing in multiple CDs with staggering maturities — which creates higher APYs on long-term CDs and ensures consistent returns through short-ter m CDs.
CD laddering could potentially help you grow your money as you navigate the current economic climate. However, proper management is a must. It’s essential to understand your CD laddering options, how CD laddering works and what steps you need to take to build an effective CD ladder.
What Is a CD Ladder?
CD laddering refers to a saving and investment strategy where a lump sum of money is divided into multiple certificate of deposits (CDs) with different maturity dates. This allows the investor to maximize higher growth rates available to CDs with longer terms while having access to a portion of the funds. You can take out the money from CDs with shorter maturities while the others still earn.
The guaranteed rate of return is one of the advantages that make CD laddering an attractive savings option. But remember that you may not be able to access your finds for a certain period.
Is CD Laddering a Profitable Investment in 2023?
Generally, CD laddering is a safe investment. Depending on where you purchase accounts, your funds may be insured up to $250,000 by the FDIC or the NCUA.
CD laddering may also be a good investment option for people who prefer risk-off environments. Each CD also has a fixed APY, which means there’s a guaranteed return throughout its term.
By dividing your funds into different CDs, you can earn better returns while having access to a portion of your money every time a CD reaches maturity. This may provide additional financial security, especially in an economic situation heading into a recession.
Use the following to get an idea of how much more can be earned from CD laddering.
Investing in 1-Year CDs
Today: 1/27/2023 Investment amount: $10,000 Rate: 1.25%
Investing in CD Laddering
Today: 1/27/2023 Investment amount: $10,000 Rate: 1.25% - 2.25%
Building a CD ladder can lead to higher total earnings, especially since CDs with longer terms tend to have higher APYs.
For instance, investing $10,000 in a CD account with a one-year term and reinvesting the total after maturity to another one-year term repeatedly for 10 years can increase your money by $1,322.71. A similar amount invested in different CDs with staggering maturity dates can lead to $1,514.35 in total earnings in the same period.
Note that the examples use simple interest instead of compound interest, which further grows your balance.
How to Build a CD Ladder
Building a CD ladder could be a lucrative option for people who want to secure their money in deposit savings accounts while earning interest. However, there are certain factors you should consider.
Determine whether CD laddering fits your financial situation and goals. Comparing CD laddering to other saving and investment options may also be best.
Factors to Consider When Setting Up a CD Ladder
Saving is essential to money management. It helps you achieve your financial goals and provides a financial safety net for emergency expenses.
CD laddering is a strategy you can use to increase your savings. Consider the following factors to see if it’s the right addition to your portfolio.
What are your reasons for building a CD ladder?
Understanding your goals can help you decide whether CDs are right for you. Why do you want to invest?
How much would you like to set aside?
Remember that you may not be able to access your funds until the CD with the shortest term reaches its maturity date.
How many CDs do you want to open?
Determining how many CDs to open is crucial as it affects your earnings. You should also figure out the amount you want to allocate to each CD.
Which maturity terms do you want to choose for each CD?
Typically, you can find one-month to 5-year terms. Those with longer terms tend to have higher returns.
Where do you want to open your CDs?
Compare rates from different institutions offering CDs. Those purchased from federally insured banks and credit unions are insured. There are also brokerage firms and independent salespeople, but they may charge fees.
Steps to Build a CD Ladder for the First Time
Building a CD ladder can take some research, especially for first-timers. Knowing what steps to take can help you navigate the process and prevent mistakes.
Below is a step-by-step guide with examples to give you a better idea of what to do.
Determine the right term and amount
The right amount and term may vary per person because of differences in needs and situations. You first need to determine how much to invest and the length of term for your term length. There’s no rule regarding the amount you should invest in a CD ladder. Some institutions may have a minimum deposit requirement, so reviewing this information is a good idea.
Let’s say that Sam, a first-time investor, wants her $25,000 savings to earn interest and she wants to ensure that it remains secure. She decides to give CD laddering a try.
Open and separate the initial CDs
When you know how much to put into your CD ladder, you need to determine how to divide the funds. Decide how many CDs you want to manage and the terms for each. The most common option is to divide the investment evenly into five CDs. Allocating different amounts to the accounts is also an option. You can also open your CDs from various institutions.
Now that Sam has set the amount she wants to invest, she decides to spread her money evenly ($5,000) into five different CDs with staggered maturity dates.
Once the first CD reaches its maturity date, the principal plus all interests earned can be cashed out. You may also opt to continue your CD ladder by reinvesting the money into a new CD and repeating the process every time a CD matures.
Sam decides to build her ladder by reinvesting her initial funds plus the interest into five-year CDs to get higher returns. She does this for each CD that matures.
Here’s how much she would reinvest:
- $5,000 + the interest for the initial one-year term in a five-year CD
- $5,000 + the interest for the initial two-year term in a five-year CD
- $5,000 + the interest for the initial three-year term in a five-year CD
- $5,000 + the interest for the initial four-year term in a five-year CD
- $5,000 + the interest for the initial five-year term in a five-year CD
Review your CDs
You can choose what to do after each CD matures. Although reinvesting further grows your money, reviewing your financial situation after every maturity date is important. You may use the money to cover other expenses depending on your needs.
You should also check current APYs. If the rates are too low, you may consider breaking up your ladder and finding a different option that offers higher rates.
Sam has already reinvested her first five CDs and rolled them over to new CDs with five-year terms. Upon review, she realizes she wants to explore other options that offer higher returns. Here are some alternatives to choose from:
- High-interest money market account
- Mutual funds
CD Ladder Strategies
One of the things that make CD laddering appealing is the flexibility it offers. There’s no single way to go about it. The best method is the one that can help financially prepare you to face the current economic climate.
Here are some examples of common investor profiles and the type of CD laddering strategy best suited for each profile:
You Have Some Savings but Need Frequent Access to Your Funds
If you have decent savings you want to grow but need frequent access to your money due to short-term financial goals, you can opt for shorter lengths like one-year CDs.
For example, a parent wants to keep their child’s annual tuition fee, insurance payment and mortgage in a secure place. They can set up their CD ladder in a way that allows them to access portions of their cash when they need it.
CD ladders don’t have to include long-term CDs. The idea is to have staggered maturities. That means you can opt for shorter terms. This type of ladder is called a mini CD ladder.
Mini CD ladders have short-term CDs. For instance, three-, six- and nine-month terms. Although these tend to have lower interest rates, they can still help you grow your money.
CD 1 (three- month)
CD 2 (six- month)
CD 3 (nine- month)
You Have Substantial Savings and Don't Need Immediate Access to Your Capital
If you have a large amount of cash sitting in a non-earning account, you may want to consider CD laddering. You may opt for CDs with longer terms if you don’t need immediate access to your money.
Long-term CD laddering is similar to the standard CD laddering strategy. However, it only includes CDs with longer maturities.
Long-term CD ladders offer more earnings to investors. That’s because CDs with longer terms usually have higher interest rates.
CD 1 (three-year)
CD 2 (four-years)
CD 3 (five-year)
CD 1 rolled over (five years)
CD 2 rolled over (five years)
CD 3 rolled over (five years)
You're Interested in Exploring Short-Term and Long-Term Strategies
Having different savings goals may require a different strategy. For example, if you need access to a more significant portion of your money, you can opt to put more in shorter terms. But if you aim to accumulate more, you can put more in longer terms with better APYs.
There are typically no restrictions when distributing your cash into CDs. Depending on your savings goals, some CDs may have more deposits than others. This method is known as uneven splits.
The table below shows how uneven splits work. Calculations are based on compounding interest.
CD 1 (one-year)
CD 2 (two-year)
CD 3 (three-year)
CD 4 (four-year)
CD 5 (five-year)
When Is CD Laddering a Good Option?
There are various reasons that make CD laddering a great saving and investment strategy. For instance, it tends to lead to higher returns than traditional savings accounts.
There are also potential drawbacks to watch out for. Unlike high-yield savings accounts, you can’t access the funds you deposit in CDs anytime you want. You have to wait for the maturity date. Otherwise, you’d have to pay an early withdrawal fee.
- CD laddering offers a guaranteed rate of return as each CD earns interest at a fixed rate.
- You can earn more money by choosing longer terms with higher rates.
- You decide how much money to invest in each CD, the terms of each and whether to reinvest them upon maturity.
- Although the rate of return for CDs tends to be higher than traditional savings accounts, there are other investment options like stocks and bonds with higher returns.
- CDs offer guaranteed returns, but the rates may still be outpaced by inflation.
- Money deposited in a CD can’t be withdrawn until the term ends. Early withdrawal typically leads to penalties.
Maximizing the Benefits of CD Laddering
If you think CD laddering is right for you, the next thing you need to do is ensure that you can maximize the benefits it offers. Compare offers from various institutions. If you want a safer option, purchasing CDs from federally insured banks and credit unions may be better. On the other hand, some brokerage firms may offer higher rates but come with higher risks.
Choose the right bank
Check for minimum deposit requirements. Compare terms available and withdrawal penalties. Depending on the service provider, there may also be additional fees.
Find the best CD ladder rates
APY is an essential aspect of CD laddering as it determines how much your money can earn. Consider different scenarios and calculate possible earnings from institutions based on their APYs to fund the best offer.
Consider a quarterly ladder strategy
Choose a strategy that works for you. If you’re looking for a method that offers more liquidity, consider a quarterly ladder strategy wherein maturity periods are three months, six months, nine months and one year.
Getting Help From Financial Advisers
If you find it difficult to build a CD ladder or are looking for professional guidance, hiring a financial advisor may be best for you. They can help you manage your finances to improve your financial situation. They can also provide advice for attaining financial goals. Additionally, they have the industry knowledge necessary when making investment decisions.
Your financial advisor can work with you as you go through the journey to financial security. They can provide valuable insights into various financial products.
When choosing a financial advisor, look into their expertise, qualifications and experience. You should also check your compatibility, as you should be able to communicate with them easily.
Expert Insight on CD Laddering
Figuring out how to create the best CD ladder can be challenging. MoneyGeek asked some industry leaders to share some expert insight you can use as you in your saving and investment journey.
- What are the most important considerations when determining whether CD laddering is right for you?
- When is it best to start with CD laddering? When is it not?
- What financial tips can you share with individuals who plan on or are new to investing?
Professor of Economics at Villanova University
Financial Expert and Founder of Fluent in Finance
Certified Financial Planner and Founder of ohanthemoneydoctor.com
Finding the right resources can help you make well-informed decisions. MoneyGeek compiled a list of resources and tools you may find helpful as you navigate CD laddering and investment.
- ChooseFIFoundation: Sign up for this free training course and become more financially literate. Learn about financial independence and how to achieve it.
- FDIC BankFind Suite: Find out what federally insured banks offer their services in your area by selecting your city, state or territory, and zip code in the FDIC’s BankFind Suite.
- FINRA: Access guides on personal finance and investing. Find investor tools you can use for free.
- HelpWithMyBank.gov: Learn more about CDs FAQs from the Office of the Comptroller of the Currency.
- Investor.gov: Learn more about CDs.
- Investor.gov: Whether you’re a newbie investor or have been investing for a long time, reviewing the basics is a must. Use the SEC’s introduction to investing guide to learn more about investment products and markets.
- National Association of Personal Financial Advisors: Locate a fee-only advisor near you through the (NAPFA) finder.
- NCUA Credit Union Tool: Find out if a credit union is federally insured by the National Credit Union Administration.
- Nav.it: Start a habit of saving and monitoring your finances using this tool.
- U.S. Securities and Exchange Commission: Learn more about investing with the help of this beginner’s guide from the SEC.
- Women’s Institute for a Secure Retirement: Find guidance and tips you can use as you start your saving and investment journey.
About Nathan Paulus
- Board of Governors of the Federal Reserve System. "Changes in U.S. Family Finances from 2016 to 2019: Evidence from the Survey of Consumer Finances." Accessed January 16, 2023.
- Federal Deposit Insurance Corporation. "National Rates and Rate Caps." Accessed January 27, 2023.
- Investor.gov. "Certificates of Deposit (CDs)." Accessed January 16, 2023.