If you’re looking for a flexible way to save, but still want to take advantage of high interest rates, building a CD ladder could help. Although interest rates on CD accounts have been softening, many accounts still offer 4% to 5%. With a CD ladder, you can lock in these high interest rates while they last and still access your cash at regular intervals.
What is a CD ladder?
With a CD, you agree to keep your money in an account for a certain period in exchange for a guaranteed interest rate. Terms range from three months to five years or more. The longer the term, the higher the rate. But you may not want to lock your money up for years. One way to stay flexible is with a CD ladder.
A CD ladder is a type of savings strategy where you spread your cash between several CD accounts with staggered maturity dates. This lets you take advantage of higher rates on longer-term CDs, while keeping a portion of your funds accessible at short-term intervals. CD ladders offer a flexible way to save your cash, as you’ll be able to access your money at regular intervals. Plus, opening a CD ladder eases the pressure of having to guess whether CD rates will go up or down.
Building a CD ladder
To build a CD ladder, spread your cash among CDs of varying maturities — say, one, two, three, four and five years. Some of your savings will capture the higher rates that long-term CDs offer. When your first CD matures, you can cash out or reinvest the cash in a new 5-year CD to continue building your ladder. Then, when subsequent CDs mature, you’ll continue to reinvest those funds into new CDs to maintain the ladder. Plus, if rates continue to rise, you’ll be able to reinvest the money at a higher yield.
You’ll earn more if you ladder using CDs at more than one institution, but you’ll have to weigh the extra time you’ll spend setting up multiple accounts. However, you can easily compare current CD rates, by using our tool, powered by Bankrate, below.
Here’s an example of how a CD ladder would work. Typically, a CD ladder splits your cash into five “rungs,” meaning you’ll open five CDs, one year to five years. Let’s say you have $20,000 to invest. One way you could spread your cash is by splitting it equally.
- $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 each CD matures, you’ll invest your cash, plus any earned interest, into another 5-year CD. This leaves you with five 5-year CDs, one maturing each year.
Advantages of a CD ladder
- Consistent cash flow: Since each CD matures at a regular interval, you have consistent access to your cash.
- Interest rates: As each CD matures, you have an opportunity to reinvest your cash and take advantage of any rise in interest rates.
- Flexibility: You can save in CDs at different financial institutions, letting you score the best interest rates available. Plus, you can choose whether or not to reinvest your cash once your CDs mature.
Disadvantages of a CD ladder
- Active management: Since you'll be opening multiple CDs, potentially at different banks or credit unions, it'll take some work to manage your accounts. If you forget to move funds from one CD to another once it matures, the CD could roll over into the same term that just ended.
- Inflation: Although rates are high, they are still outpaced by inflation. You could earn more from more aggressive investments, like stocks or bonds.
Bottom line
While a CD ladder strategy works for some people, it won’t work for every saver. It all comes down to how you feel most comfortable saving, and how readily you need to access your account deposits.
Factors to consider:
- You can’t change or remove rungs once you put your money down. If something happens where you need your money before the CD term is up, you may have to pay penalties for cashing out early. If you need even more flexibility and access than a CD ladder can provide, ahigh-yield or money market accountmight be more your speed.
- CDs are typicallyFDIC insured, meaning your cash will be covered up to $250,000 at any given bank. And since you lock in your interest rates, a change in the economy or outlook fromthe Fedwon’t affect your future savings.
Related Content
- 1-Year vs. 5-Year CD Accounts
- Best No-Penalty CD Rates May 2023
- CD vs. High Yield Savings Account: Which is Better?
FAQs
A CD ladder can help you build a predictable investment return. It also provides the potential to earn better returns than you would with a single CD and the ability to access a portion of your savings each time a CD matures.
Is laddering CDs a good idea? ›
A CD ladder can help you build a predictable investment return. It also provides the potential to earn better returns than you would with a single CD and the ability to access a portion of your savings each time a CD matures.
What is the CD ladder method? ›
A CD ladder involves opening CDs of different term lengths and regularly renewing short-term CDs for longer terms. This tactic lets you benefit from long-term CDs' higher rates and short-term CDs' frequent access to funds.
What is a primary benefit of using a CD ladder for your emergency funds? ›
Benefits of CD Laddering
Reduced Interest Rate Risk: Diversifying across CDs with varying maturity dates in a ladder minimizes the impact of fluctuating interest rates, enhancing overall financial stability and reducing risk.
Are CD ladders FDIC insured? ›
Key takeaways
A ladder of CDs may offer both higher yield and greater access to your money than a single CD. CDs are insured by the FDIC, within limits.
Why should you put $20,000 into a 3 year CD right now? ›
Your principal is secure
If you put $20,000 into a 3-year CD with an interest rate of 4.85%, you'd earn a total of $3,053.42 in interest at the end of the three years. And, your principal — which is the initial $20,000 you deposit — will be safe.
Are CD ladders good for retirees? ›
If you are retired, you could find building a CD ladder beneficial. This safe investment can help you maximize your returns, while reducing the chances your retirement accounts run dry while you're still relying on them.
How much does a $5000 CD make in a year? ›
We estimate that a $5,000 CD deposit can make roughly $25 to $275 in interest after one year. In comparison, a $10,000 CD deposit makes around $50 to $550 in interest after a year, depending on the bank.
Can you make money with a CD ladder? ›
If you're looking for a reliable, low-risk way to earn on your savings, a certificate of deposit (CD) ladder offers both long-term interest rates with steady returns.
How many CDs can you have at one bank? ›
There's no limit on the number of CDs you can have, and it's possible to have multiple CDs at the same bank or different financial institutions.
Lowers interest-rate risk: A CD ladder provides regular opportunities to reinvest cash as the CDs mature while reducing interest rate risk. After all, if you put all your funds in one 4-year CD, you may miss out on any rise in interest rates.
How to build a monthly CD ladder? ›
Once you've determined how much you want to save and how many CDs you want to open, open your CDs, staggering the CD terms so that your money will mature at different dates on a rolling basis (every year, every six months… whatever you choose). Continue laddering.
Should I put my emergency fund in a CD? ›
First, don't lock up your entire emergency fund in a CD. Keep a comfortable amount in a savings account. This way, if you have a smaller emergency, such as a car breakdown, you still have the funds to cover it.
Are CD ladders a good idea? ›
It is a safe investment, as it is insured by the Federal Deposit Insurance Corporation (FDIC). It provides a steady, predictable income stream, reducing risk by spreading your investments over several CDs (and banks). It lets you take advantage of interest rate increases by rolling over CDs on a schedule.
How does a CD ladder work for dummies? ›
With a CD ladder, you set up multiple CD accounts with different term lengths rather than putting all your savings into one CD. In the most common ladder strategy, you divide your total savings equally among five CDs, each with a length one year longer than the previous. Let's walk through how it works.
Are CD ladders taxable? ›
Regardless of how the yield is paid out to the investor—it usually goes into another account or is reinvested back into the CD—the money earned is considered taxable on both state and federal levels.
Should I lock in a CD now or wait? ›
Waiting to open a CD could mean missing out on some stellar rates. Now, you can lock in high rates on both short-term and long-term CDs, and you can score some serious interest just by opting to deposit a larger lump sum into your CD.
Why are CDs not a good investment? ›
CD rates may not be high enough to keep pace with inflation when consumer prices rise. Investing money in the stock market could generate much higher returns than CDs. CDs offer less liquidity than savings accounts, money market accounts, or checking accounts.
