CD ladder strategy: How to choose terms, build a ladder and reinvest wisely

You often have a trade-off to consider when it comes to your savings strategy: higher fixed returns or regular access to your money. CD laddering can help balance those priorities. The strategy involves saving money in multiple certificates of deposit (CDs) with staggered maturity dates. You can then access funds at regular intervals but also take advantage of the higher yields often available on longer-term CDs.

A successful CD laddering strategy requires considering the terms of each CD, deciding whether to reinvest at maturity and adapting to changing interest rates and personal financial goals.

Understand how a CD ladder works

A CD ladder allows you to customize access to your funds and enjoy the security of fixed interest rates. The specifics of your strategy will depend on your savings goals.

What is a CD ladder?

A CD ladder is a savings strategy in which you divide your funds across several CDs with different maturity dates. Longer-term CDs often offer higher rates, while shorter terms provide quicker access to your money, though you should compare current APYs before choosing your CDs.

Why investors use CD ladders

Investors like CDs because of their predictability and flexibility. CD ladders provide predictable returns, both in terms of timing and amount. Plus, by staggering your maturity dates, you can reduce the timing risk associated with reinvesting. Since they don’t all mature at the same time, you reduce the risk of being stuck reinvesting your entire balance during a period when interest rates are down.

A simple example of a five-year CD ladder

Let’s say you have $25,000 to invest across five CDs. Your CD laddering strategy might look like this:

• One-year term CD: $5,000
• Two-year term CD: $5,000
• Three-year term CD: $5,000
• Four-year term CD: $5,000
• Five-year term CD: $5,000
  

Decide whether a CD ladder fits your savings goals

CD laddering isn’t the right strategy for everyone. As with any savings plan, your individual needs and goals will determine whether it’s the right strategy for you. While CD ladders offer relatively flexible access to funds, they shouldn’t be viewed as everyday savings accounts. They aren’t the place to put money you may need quickly and unexpectedly.

Financial goals that work well with a CD ladder

A CD ladder could be a good savings option for future goals like a home or car purchase, a home improvement project, tuition, or retirement withdrawals. These are all financial needs you can anticipate and plan for, so you’d have the opportunity to wait for a CD to mature before withdrawing funds.

When another savings option may make more sense

CDs aren’t completely out of the question for emergency savings, but you should only consider them if you already keep sufficient emergency savings in a liquid account. After all, the nature of an emergency fund is that it’s there right away when an unexpected financial emergency arises. Since you can’t immediately access CD funds without potentially incurring an early withdrawal penalty, a CD ladder isn’t where you want to house your basic emergency fund.

High-yield savings accounts and money market accounts may be better savings vehicles for your “there when you need it” emergency fund.

Common situations where a CD ladder may not be ideal

A CD ladder works best when you can reasonably predict when you’ll need your money and can leave each CD untouched until maturity. CDs aren’t ideal for short-term cash needs, so if there’s a chance you’ll need the funds sooner than the CD’s term, a savings vehicle that doesn’t penalize you for withdrawing funds early is a better option.

Choose the right CD terms for your ladder

Setting up your CD ladder requires looking at the terms of the individual CDs, your personal goals, and even the macroeconomic environment.

Factors to consider before selecting CD terms

Assess your needs and financial goals as well as the larger economic environment:

• What is your savings timeline?
• What goals do you have for your funds?
• Will you need liquidity soon, or can you reinvest your CD when it matures?
• Is your financial situation stable, or do you anticipate a near-term shake-up (job change, relocation, family status change, etc.)?
• What rates are available for the terms you’re considering?
  

How interest-rate trends influence your decision

Fixed-rate CDs can be particularly attractive when rates are expected to fall because they allow you to lock in today’s rate for the term.

Conversely, fixed-rate CDs can be less attractive in a rising-rate environment. Your money could end up locked at a lower rate when new CDs and variable-rate savings products begin offering higher yields. Still, a ladder means your shorter-term rungs mature more quickly and may allow you to capitalize on rising rates while your other rungs remain locked at their existing rates.

Callout box: There are CDs that offer one or a limited number of rate increases during the CD’s term in the event the bank raises rates for that specific term after you’ve opened your CD. These are often called bump-up or raise-your-rate CDs. Talk with your financial institution to determine availability.

Common CD ladder structures

One-, three- and five-year options are common, but there are shorter ladders if your financial circumstances require it.

A one-year ladder could include three-, six-, nine-, and 12-month CDs, while a three-year ladder may include one-, two-, and three-year CDs. You could even establish a six-month ladder using three- and six-month CDs if your needs are especially short-term.

Short-term vs. long-term CDs: Which works best?

Shorter terms may make sense when you want more frequent access or expect rates to rise. Longer terms may work better when you can leave the money untouched and want to lock in an attractive rate for longer.

SEE MORE: Best CD laddering strategies for maximum interest growth

Build your CD ladder step by step

It’s time to start building your CD ladder. Here are the steps.

Decide how much money to invest

Choose an investment amount that you can comfortably set aside for the length of your terms. This is also the time to think about your goals for the money and what length of ladder you’re looking to create based on your needs.

Split your money across multiple CDs

You can choose to split your money equally or fund CDs with different terms with different amounts. Splitting your investment equally is easier to keep track of and helps even out the various interest rates over time as you reinvest.

But splitting your amounts unequally allows you to customize each term to your needs. It also allows you to respond to the larger interest rate environment. For instance, if you anticipate rates falling in the long term, you may allocate more money to your longer-term CD, so you can lock in today’s rates for longer.

You don’t need to invest a specific amount of money in your CD ladder. Find the amount that works for you.

When the one-year CD matures, decide whether to withdraw that money if you need it or reinvest it in a new five-year CD.

Open CDs with staggered maturity dates

Space out the maturity dates of the CDs you open. Doing so means you’ll have funds becoming available at regular intervals that you can choose to spend or reinvest across a predictable timeline.

Track maturity dates and review your ladder

Keep careful records of your maturity dates. You don’t want to allow a CD to roll over, thereby starting a new full term, if you’d planned to withdraw that money or move it to a different CD.

Know what to do when a CD matures

You have options when your CD matures. To make the most of those opportunities, start making a plan before the maturity date.

Your options at maturity

You have three primary options when your CD matures:

• Withdraw your funds — if you have plans for the money you invested and earned.
• Allow the funds to roll over automatically — if the renewal terms and APY fit your plans and goals.
• Open a new CD — if you’ve found better rates or terms elsewhere.
  

How reinvesting keeps the ladder working

If your financial plan allows for it, reinvesting your funds as each rung of your ladder matures will keep your ladder going.

For example, let’s say the $2,500 one-year rung in a five-year ladder earns a 4% APY. You’ll have $2,600 when it matures after 12 months. You could reinvest that $2,600 in a new five-year CD, then do the same with each subsequent CD that matures. After five years, you’ll have five 5-year CDs with one maturing every year.

Mistakes to avoid during the grace period

Many institutions offer a brief grace period after maturity before an automatic rollover. Check with your institution to understand grace period terms and renewal options.

Ideally, you’ll know what you want to do with your CD well before the maturity date, but if not, don’t waste the grace period. Take the time to research better rates and consider other options that fit your financial plan. Just don’t miss the deadline to make a decision.

Understand the benefits and trade-offs of CD laddering

There are pros and cons to a CD laddering strategy. It’s also not the right option for every person in every financial season.

Advantages of using a CD ladder

• Predictability: With fixed interest rates and terms, you know what your CD will earn if you hold it to maturity.
  
• Flexibility: CD ladders aren’t one-size-fits-all, and there are plenty of options to meet your unique timeline and financial needs.
  
• Reduced rate timing risk: Your CDs have staggered maturity dates, so you’re better protected from needing to reinvest your entire balance during a low-interest-rate period.
  
• Disciplined saving: Early withdrawal penalties on most CDs can discourage you from dipping into savings impulsively.
  

Potential drawbacks to consider

• Lower liquidity: CDs lock away your money for a period of time. That means your funds aren’t immediately available should your needs change.
  
• Early withdrawal penalties: Many CDs allow early withdrawals, but you’ll generally pay a penalty. Early withdrawal penalties vary by institution and term and are often expressed as a certain amount of interest.
  
• Management effort: A CD ladder strategy requires management both at the initial setup and then periodically as your CDs mature. This isn’t a “set-it-and-forget-it” strategy.
  
• Opportunity cost: CDs protect you from falling interest rates, but they can also hold you back from taking advantage of rising rates.
  

Risks many savers overlook

A CD ladder is a fixed investment strategy, so it doesn’t necessarily respond well to a changing market. In particular, there’s inflation risk to consider. If inflation spikes, it can reduce your CD earnings’ purchasing power or outpace your return. Additionally, if rates rise, some longer-term rungs may remain locked at lower rates until they mature.

Lastly, institution-specific renewal policies can catch you off guard and result in an automatic renewal you didn’t intend.

Compare CD laddering with other savings strategies

CD laddering isn’t your only savings strategy.

CD ladder vs. a single CD

Putting all of your funds in a single CD offers the same fixed-rate predictability as a CD ladder strategy, but not the same flexibility or accessibility options. A ladder offers regular maturity dates and opportunities to reinvest at current rates rather than locking the entire balance into one maturity date.

CD ladder vs. high-yield savings account

A high-yield savings account (HYSA) typically features a variable APY, but you maintain liquidity that you don’t with CDs. A HYSA may be better suited to savings you could need quick access to, while a CD ladder strategy could be better for mid- to long-range planned goals.

CD ladder vs. Treasury bills

CD ladders and Treasury bills can both be used for relatively low-risk savings, but they work differently. For example, interest earned on Treasury bills is exempt from state and local taxes. You can also sell Treasury bills before maturity at market value, so you could receive more or less than you would at maturity. With a traditional CD, accessing money before maturity typically involves an early withdrawal penalty.

CDs held at an FDIC-insured bank are insured up to applicable FDIC limits, while Treasury bills are obligations of the U.S. government.

Calculate your CD ladder before investing

Model different CD terms and investment amounts to come up with a CD ladder strategy tailored to your needs.

What a CD ladder calculator can show you

Online CD ladder calculators can project your interest earnings and cash availability based on a variety of maturity schedules.

Inputs you’ll need

It’s best to use these calculators once you have a few possible CDs in mind, so you can input specific APYs, terms, and compounding schedules. You’ll also want to have an idea of how much you can invest.

Try different ladder scenarios

Calculate your returns and cash availability with various ladder structures. Consider shorter- and longer-term ladders to find the one that balances the flexibility and returns you want.

FREE TOOL: CD earnings calculator

Build a CD ladder that supports your financial goals

Your financial choices and products should support your goals, and a CD ladder strategy is no different. An effective CD ladder involves more than simply opening multiple CDs. You need a plan that includes choosing the appropriate terms for your needs, monitoring the maturity dates, and deciding when to reinvest or withdraw. Then, review your plan regularly to ensure it continues to meet your needs.

Answering common questions about CD ladder strategies

What is the best CD ladder strategy for beginners?

The best CD ladder strategy for a beginner depends on their savings goals and liquidity needs. Beginners who are tentative about locking their money into longer-term CDs can start small and short-term. Consider a three-year ladder with CDs that mature in one year, two years, and three years. Still too long? A one-year ladder with CDs that mature in three, six, nine, and 12 months is also an option.

Can you build a CD ladder with a small amount of money?

Yes, you can build a CD ladder with a small amount of money, but your options could be limited by minimum deposit requirements.

How often should you reinvest maturing CDs?

To maintain your ladder, reinvest each maturing CD as long as doing so continues to fit your financial goals and cash needs.

Can you break a CD in a ladder before maturity?

Yes, many CDs allow early withdrawals, but you’ll usually pay a penalty that can reduce your interest earnings.

Is a CD ladder better than keeping money in a high-yield savings account?

Not necessarily. CD ladders and high-yield savings accounts can both find a place in a well-balanced financial plan. CD ladders may be better for mid- to long-term goals, while HYSAs can work well for savings you may need quick access to.

How do taxes affect interest earned from a CD ladder?

CD interest is generally taxable at the federal level. State and local taxes apply depending on your jurisdiction. Consult a tax professional for information specific to your situation.