What's A CD Ladder? Here's How IT All Works.

What’s A CD Ladder? Here’s How IT All Works.

A CD ladder is a way to save money in which you buy several certificates of deposit with different expiration dates. This lets you take advantage of the higher interest rates on longer-term CDs while still having some of your money available quickly.

With this plan, you’ll withdraw money more often than if you put all of your savings in a long-term CD, but you’ll still get some long-term benefits.

What a CD ladder can do for you

CDs offer a rate of return that’s guaranteed.
You can take advantage of the higher rates on longer-term CDs without locking up all of your money for multiple years.
If rates keep going up, you can move money from CDs with shorter terms into new accounts with higher APYs.
You can get to your money quickly if you need it (though early withdrawal penalties may still apply).

How to put a CD ladder together

This is one way to set up a CD ladder. Let’s say you want to make a five-step CD ladder that lasts five years. If you want to invest $2,500, you could split the money evenly among five CDs with different expiration dates:

$500 into a 1 Year CD
$500 into a 2 Year CD
$500 into a 3 Year CD
$500 into a 4 Year CD
$500 into a 5 Year CD

You’ll have access to funds after every year, while having part of your investment earn the highest rate with the 5 year term.

When the first CD matures after a year, you can cash it out or put the money into a new five-year CD with a higher yield to keep building your ladder. Then, a year later, when the two-year CD matures, use the money from that account to open a new CD. Keep doing this every year as long as you want to keep the CD ladder.

You don’t have to start each CD with the same amount. If you want to get a higher yield, you could start each CD with a different amount. For example, if you don’t need the money right away, you might want to invest more in longer-term CDs with higher rates. Just remember that there is usually a penalty if you take the money out of the CD before it matures.

You don’t have to open all of your CDs at the same bank or credit union as you build your CD ladder. In fact, it’s a good idea to look around for the best CD rates for each term.

Some drawbacks of a CD ladder

Even though CD rates have gone up a lot in 2022, inflation is still going up faster.

You might lose out on higher returns from riskier investments, like stocks or bonds.

Are CD ladders a good way to invest your money?

A CD ladder can help you build an investment with a steady return on your money. It also gives you the chance to make more money than you would with a single short-term CD and gives you access to some of your savings every time a CD matures.

Even though you can’t lose money in an FDIC-insured CD, you might miss out on the chance to get a better rate if you reinvest shorter-term CDs when rates go down. Plus, you might miss out on better returns from other investments that have a better chance of growing.

Before you open a CD ladder, think about why you want to do so. It might be a great way to save for the short term, but if you want to save for the long term, you might need help from other investments.