If you don’t want to tie your money up in just one certificate of deposit, there’s another option. A CD ladder lets you divide a lump sum of money across several CDs with different terms. When each CD matures, you’ll have access to those funds, and then you can roll the savings, plus interest, into a new CD.
The idea is to have predictable access to your money at set times without having to pay an early withdrawal penalty. Though CDs don’t offer as much flexibility as high-yield savings accounts, a CD ladder allows you to take advantage of a fixed interest rate while having a bit more liquidity.
Still, opening multiple CDs can come with some pitfalls. If CD rates drop, it may not make sense to keep building a CD ladder, but instead to invest your savings elsewhere.
What is a CD ladder?
When you build a CD ladder, you’ll spread a lump sum of money across multiple CD terms with staggered maturity dates. When each term ends, you’ll roll the funds into a new CD, potentially at a better rate.
For example, you can build a CD ladder by spreading your $5,000 deposit across one-, two-, three-, four- and five-year CDs. When the one-year CD ends, you can roll those funds into a five-year CD knowing you’ll get access to funds from another CD the following year. The idea is to take advantage of long-term CD rates, which are typically higher than short-term CD rates (though right now, the inverse is true).
CD ladders can come with a few drawbacks. If you need to withdraw money before a CD matures, you’ll pay an early withdrawal penalty. And rates could go up while your money is locked in to your CDs, meaning that you’ll miss out on the most competitive yields. If rates fall, it may not be worth continuing the ladder as your CDs expire.
When to build a CD ladder
A CD ladder allows you to side-step the inflexible nature of CDs. With this strategy, you can form a schedule to increase your liquidity while continuously investing in CDs that earn higher interest.
“In general, this is a great strategy because longer-term CDs typically pay more than the shorter-term CDs do,” said Robert Farrington, founder of TheCollegeInvestor.com. But short-term CDs (those one year and less) are getting higher yields than most longer-term CDs right now, based on the banks we track at CNET.
If you don’t need the money immediately, a CD ladder can help you earn interest toward medium-term goals a few years later, like a down payment on a home or car. A CD ladder gives you access to some of your funds at different times and allows you to capitalize on better interest rates over time.
CD ladders are not ideal for savings that need to be kept highly liquid, like your emergency fund, which you should keep in a more accessible high-yield savings account. If you ever need money while it’s locked up in a CD, you’ll have to pay a penalty to access it.
How to build a CD ladder
1. Consider your goals
Before building a CD ladder, think about your financial goals and when you’ll need the money since you’ll have limited access to your funds for a set term.
“When you create a CD ladder, you commit your funds for a specific period in each CD,” said Doug Carey, founder and president of WealthTrace. “If unexpected financial needs arise or you want to take advantage of other investment opportunities, the lack of liquidity can be a drawback.”
2. Invest in multiple CDs
Start with an initial sum of cash divided between multiple CDs, which mature at different intervals. Depending on your desired timeline, you may choose CDs that mature every six months, every year or longer.
“Plan the duration and timing of your CDs carefully,” said Carey. “Each CD in the ladder should have a different maturity date, allowing you to access a portion of your funds periodically without incurring penalties.”
For example, if you have $20,000 to invest, you might break it up like this:
- $4,000 in a one-year CD
- $4,000 in a two-year CD
- $4,000 in a three-year CD
- $4,000 in a four-year CD
- $4,000 in a five-year CD
When your first CD matures, you can move the principal deposit (and any interest earned) into a new five-year CD. You’ll repeat this process with the remaining CDs. Here’s what it should look like using the previous example:
- $4,000 + one year of interest in a five-year CD
- $4,000 + two years of interest in a five-year CD
- $4,000 + three years of interest in a five-year CD
- $4,000 + four years of interest in a five-year CD
- $4,000 + five years of interest in a five-year CD
3. Reinvest or withdraw at maturity
As each CD term ends, you can put the money toward a goal or another savings vehicle. Or you can continue adding rungs to your ladder by rolling it into a longer-term CD -- like a three- or five-year CD. This lets you build on your initial CD ladder, while still staggering maturity dates and possibly earning the highest interest rate. If you were to reinvest your money in a five-year CD each time a CD matures, like the example above, you would have money coming due every year.
To really maximize your earnings, shop around and begin building your ladder from different CD types and at different financial institutions that offer terms and rates that work best for you.
Pros and cons of CD ladders
Pros
Fixed interest rate on CDs for a guaranteed return
Flexibility to choose from different CD terms to build your ladder based on goals
Money comes due more frequently than one CD
Ability to lock in higher rates for longer terms
Cons
Not as flexible as high-yield savings accounts
May not be as lucrative if rates decline
Requires ongoing monitoring and reinvestment
CD rates may fall for the terms you need
Should you open a short-term CD ladder?
A short-term CD ladder is the same as a standard one, but the terms are shorter -- typically one year or less. This way, CDs mature sooner, so you’ll have access to your money within a few months, depending on the term. For example, you may build a short-term CD ladder with three-, six-, nine-month and one-year CDs.
But you could be gambling with interest rates because the rate is only fixed throughout the duration of the term. If rates drop and you decide to renew your short-term CD, you’ll be stuck with the lower rate. It’s also worth noting that the annual percentage yield is the rate you’ll earn for keeping the money in for an entire year. So you’ll earn less if your term is shorter than 12 months.
Building a CD ladder with today’s rates
Banks typically move alongside the Federal Reserve’s rate moves. That means if the Fed lowers rates as inflation cools, CD rates will likely follow suit. And if rates go up, your CD ladder could be more valuable, with a bigger return if you continue to invest in it.
When the Fed opts not to raise rates (like it did in September), rates could stay roughly steady.
Since short-term CDs currently have higher APYs than long-term CDs, you might consider building a CD ladder with some shorter-term CDs. Right now, Carey recommends sticking to shorter terms, such as six-month and one-year terms, since they offer the highest yield. And you may have time to lock in a higher rate again if rates remain high over the next year.
The bottom line
A CD ladder can be an effective strategy for earning interest on your money while maintaining flexibility. But it’s not a set-it-and-forget-it strategy: You’ll need to keep track of when your CD terms end to determine what’s next for the money. You should also keep an eye on rates to make sure you’re getting the best rate possible for your new CD.
A CD ladder may be less effective when interest rates are low, as you may lose out to inflation. As rates continue to shift, keep an eye on other banks and savings vehicles for your money to make sure you’re getting the best return while maintaining flexibility. Government-backed I bonds, for example, can be a good alternative to a CD.
Correction: An earlier version of this article was assisted by an AI engine and it mischaracterized some aspects of CDs. Those points were all corrected. This version has been substantially updated by a staff writer.
This article includes some material that was previously published on NextAdvisor, a CNET Money sister site that was also owned by Red Ventures and which has merged with CNET Money. It has been edited and updated by CNET Money editors.
