What Is a CD Ladder?

These simple savings accounts provide predictable returns.

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certificate of deposit, or CD, is a type of savings account into which you deposit a lump sum, usually earn a fixed rate of interest and typically withdraw all at once at a predetermined date. To build a CD ladder, you can simultaneously open multiple CDs with different maturity dates; when one reaches its maturity date, you take your initial deposit and any earned interest and open another one. This provides an ongoing savings strategy that also helps you leverage the highest CD interest rates, which are usually available for only longer-term CDs. 

A CD ladder can be a solid option if you're looking to save money, earn a higher interest rate (relative to a traditional savings account, anyway), and don't mind tying up your money for a set period of time. Here's everything you need to know about how to set up a CD ladder. 

How does a CD ladder work?

You can build a CD ladder by investing in several CDs with staggered maturities. For example, you might invest in a CD with a one-year term, another CD with a two-year term, a third CD with a five-year term and so on. The amount you invest in each CD can vary, depending on how much you expect to need at future intervals. However, a traditional CD ladder typically has five "rungs." 

With this strategy, you'll want to divide your investment equally into five CDs with different maturity dates. If you have $5,000 to invest, you may break it up like this: 

  • $1,000 in a one-year CD 
  • $1,000 in a two-year CD
  • $1,000 in a three-year CD
  • $1,000 in a four-year CD
  • $1,000 in a five-year CD

As a CD matures, you'll take the principal deposit (and any interest earned) and open a new five-year CD. The following year, you'll approach the two-year CD the same way, and so on. In theory, you'll reinvest each deposit into a new CD at least once. But CD ladders allow enough flexibility that if you decide rates are too low or your investing goals change, you can break up your ladder. However, keep in mind that some CDs may roll over automatically, so be sure to read the fine print.

Pros of a CD ladder

  • Interest rates on CDs are typically higher than those of savings accounts, so you may earn more money by investing in CDs. 
  • With a CD ladder, you can easily redeem short-term CDs and reinvest in longer-term ones if interest rates have gone up.
  • You can choose where to reinvest your funds when a CD matures, rather than having to commit to a new CD with the same bank. This makes it easier to take advantage of new rates as they fluctuate over time.

Cons of a CD ladder

  • CD rates tend to be low and may not keep up with inflation.
  • You may not maximize your earnings by forfeiting higher yields provided by longer-term CDs.
  • There are more aggressive investment strategies available on the market. You may miss out on better returns offered by other investment vehicles with greater growth potential, such as stocks and bonds.

Are CD ladders a good investment?

In most cases, a CD ladder offers more liquidity than one single CD, though it depends on the terms and maturity dates. Even though you may not earn as much with a CD as you might with other investments, a CD is a relatively safe option. Stocks, in contrast, can lose money. If you're looking for predictable returns and don't want to risk losing money, a CD ladder can be a good investment.

However, if you're looking to make more money in the long term, though, you could stand to benefit more from other investment strategies. Before you commit to a CD ladder, make sure you're carefully considering your short-term and long-term investment goals. 

Correction, 4:00 p.m. PT Jan. 30: This article was corrected to clarify that most CDs earn a fixed rate, though there are some variable-rate CDs. The article was also corrected to clarify that funds are typically withdrawn from CD after its maturity date; customers can usually withdraw their money from a CD early, however, though they may have to pay fee or forfeit some or all of their interest, unless it's a no-penalty CD. This article was also corrected to clarify that interest rates on CDs are typically higher than rates on savings accounts. This article was also corrected to clarify that a CD ladder may offer more liquidity than a single CD, though it depends on the specific terms and maturity rates. The article was also corrected to clarify that you may not earn as much with a CD than you would with a higher-risk investment such as a stock.