CD Ladder

What is a CD Ladder and How Can I Build One?

Stashing away money in different savings accounts is a good investment strategy. However, do you know you can employ more aggressive methods to earn you more from the savings? Well, the CD ladder is your best bet when it comes to increasing your earnings from a savings account.

This savings strategy is a life-saver because it takes advantage of CDs. It also helps you avoid bottlenecks associated with traditional savings.

Nevertheless, this investment strategy just like any other comes with its own risks. Take a look at this guide into building a CD ladder as you learn what a CD ladder is.

What is a CD?

A certificate of deposit or CD as it’s popularly known is identical to the old savings account because you can deposit your money into a bank account. However, that is just about it when it comes to similarities. The real difference comes with the timing of the deposits.

This means you cannot withdraw funds from the account as you would like in a traditional savings account. The money has to stay in this account for a certain period of time. This time will, however, depend on the type of account you select. The longer you decide to have your money in a CD, the more interest it will accrue.

Another way of getting annual percentage yield (APY) or high-interest rates is by depositing a huge amount of funds. If you don’t have an immediate use for a certain amount of money, you can deposit it in a CD savings account.

Certificate of deposit can be found at almost all financial institutions. In credit unions, the term used is share certificate. Besides physical banks close to you, you can search for online banks with the best APY. While seeking the best interest rates, make sure you also check for the best rates depending on how long you want the money to stay in a CD.

These term lengths are known as the “maturity” which signifies the end of a CD period. Also, keep an eye for banks offering bonus CD rates. Some banks offer good deals, especially if you hold an existing account with them.

Types of CD Ladders Available

Variable Rate CD

As the name suggests, the rates of the CD will vary depending on various factors such as treasury bills and prime interest rate. As a result, the final rate applied to your CD will be a certain amount added to the base rate.

If market rates shoot up, then your APY will go up as well. If they go down, your APY goes down as well.

Step Rate CD

This type of CD offers more flexibility. Your CD will enjoy certain increases in interest rates. However, the catch is you’ll need to start with a huge minimum balance. In addition, you get a chance of to withdraw some amount when the next increase is due without incurring penalty fees.

Penalty-Free CD

This type of CD offers the most flexibility, but you’ll have to contend with the restrictions. Some include shorter length term choices and high minimum balances. Also, the interest rates can be quite low.

Callable CD

In this CD, you’ll get the highest interest rates, but the bank will choose when to end the CD term. If the bank feels the CD isn’t financially beneficial, the CD is termed “Callable.”

Market-Linked CD

This is the riskiest of all CDs because the interest rates are pegged to certain market indexes. Since the market is unstable, it’s difficult to forecast what lies ahead like you would with standard rates.

The CD Ladder

Similar to traditional savings accounts, you can deposit funds into a CD and wait for a few years for the funds to accrue interests. However, with a CD ladder, the technique is different. A CD ladder uses a structure whereby you can split your money into several CDs to increase your liquidity and earnings.

Here are the basics:

Instead of depositing a huge amount of money into a single CD for a fixed period of time, you can spread the money over several CDs each with a different maturity date. By doing this, each CD will mature at different stages in time, which means you’ll have access to funds at no penalty or you can decide to put the money back into a different CD.

By using a CD ladder, you eliminate a number of limitations other savings accounts come with. One of them being liquidity. By using a CD ladder, your money remains liquid because you have a maturity date on the horizon. In addition, you have better chances of maximizing the interest rates by staying away from penalties due to early withdrawals.

It goes without saying that, CD ladders come with their own pros and cons. In this article, we’ll go through this including practical examples of how to use a CD ladder. We’ll also take a look at some of the pitfalls of using this money strategy.

The Benefits of Using CD Ladder

One of the similarities a CD shares with other savings account is the fact that your money is insured by the FDIC. This means rest easy when placing your funds in a CD. In addition, you can keep your money as liquid as possible, all dependent on how you spread your CDs.

What’s more, you can benefit from the high-interest rates offered. After you get your ladder on the road, you can adjust it so that you can continue to buy the long-term CDs. The latter gets the highest rates because the bank or financial institution gets to hold on to your capital for a while longer.

Even if interest rates fall or rise, you have a chance of managing the risks involved in the following way:

Should the interest rates shoot up, a CD ladder will allow you to access your funds on a regular so that you can take advantage of the high rates to enter into a new CD using the current rates. On the other hand, should the interest rates take a nosedive, you can be assured knowing that your funds are tucked away in a CD account with a fixed rate for up to 5 years.

All in all, a CD ladder will help shield against risks associated with both instances. You decide whether it’s good for a savings plan.

CD Ladder Structures

You can use a number of ways to construct a CD ladder. Below are a number of examples. As you come up with a CD ladder, you need to keep in mind your financial needs in the next few years. Also, you can come up with a simple ladder in an instant or you’ll have to adjust various aspects of the ladder to make sure you stay within your savings plan.

 The Classic CD Ladder

This is the most commons structure used because it only needs one to spread their funds over a number of CDs. To begin, you can select different CDs of varying lengths, at least a year’s difference. Afterward, once the earliest CD matures, you can reinvest it into a CD with a long-term, one that will mature after the longest CD.

Take this practical example:

Let’s say you have $8,000 to tuck away in a CD savings account. Put away $1,600 in a one-year CD and then spread the remainder equally over a one-year difference on increments. This is how the ladder will look like:

  • One-year CD: $1,600
  • Two-year CD: $1,600
  • Three-year CD: $1,600
  • Four-year CD: $1,600
  • Five-year CD: $1,600

Once the one-year CD matures, reinvest it a different five-year CD. At this point, the longest CD which is the five-year one will have 4 years remaining. Do the same for the other CDs and you’ll get to a point where you’ll invest in the long-term accounts with a single CD maturing yearly.

If you get an emergency, you can withdraw the needed amount when the CD ladder is due. Sometimes you’ll have to wait for a few months to when the CD is due to mature depending on whether you reinvested the money and you came across a pressing need.

However, even if you get into a cash crunch, you are sure you’ll have funds available at a certain date. This way, you can increase earnings using the interests at the same time not locking your funds for a long time.

Spreading Purchases

Instead of buying your CDs at a go, you can buy a single CD of a fixed length at different intervals. An example is buying a two-year CD at 6-month intervals.

By doing this, you increase the number of times your CDs mature to 2 times a year. This makes your money liquid after the first matures. Furthermore, it allows you to seek the funds to invest after making the first deposit. This means you don’t need to have the entire amount at once.

Keep an Eye on the Economy

Another way of building a CD ladder is by randomly investing. By random, it means keeping an eye on the economic situation that will guide you into making your deposits.

Sounds complicated huh? Well, not really.

For example, if the interest rates begin to go up, you can put your CDs into short-term certificates. This way, you won’t lock your investments in a low-interest account for another 5 years when a traditional liquid savings account starts to earn a higher interest.

In the contrast situation, should the rates start taking a nosedive, you can out way your money in a long-term CD with the highest APY. This way, you’ll enjoy the current rates for a while before dropping further.

Economic forecasting is a tricky affair. This is because you can’t predict 100% what will happen to the economy and your life as well. However, the best way to avoid severe losses is by diversifying your portfolio. Simply put, don’t carry all your eggs in one basket.

Drawbacks to Using a CD Ladder

There are some shortfalls when it comes to the use of a CD ladder, but some might not be as important to you as others. One of the drawbacks is some level of liquidity, but that will depend on how to construct your ladder in terms of maturity dates.

Another drawback is getting stuck in a CD offering low-interest rates. If you find yourself in such as situation, chances are you could suffer inflation. If the latter goes up when your money is in such a CD, the amount you end up with will not be as much as what you started with. The purchasing power of the money you’ll get after maturity will have dropped.

Should You Go for a CD Ladder?

Before going creating a CD ladder, you need to take various aspects into consideration:

Your Emergency Fund

This is the first and most important consideration. How much in total do you have in savings? Also, do you have a readily accessible fund when emergencies hit? Do you have 3 to 6 months’ worth of expenses put aside?

If you don’t have any of these, it’s advisable to withdraw your ambitions of going for a CD and save towards them. On the other hand, if you tick all the boxes consider the following.

The Interest Rates

Do your research when it comes to interest rates. You don’t want to get a raw deal for your savings, especially if you intend to put away huge amounts of dollars in the CDs.

The Timelines

You also want to consider the maturity dates of the CDs you intend on investing in. the best way to deal with timelines is to identify your immediate and future needs and how you’ll take care of them before the CDs due dates. After that, you can spread out the CDs based on the needs.


Certificate of deposits is a fantastic way of investing, especially if you craft a great CD ladder to help you spread the deposits to maximize liquidity and earnings. At this point, you know what a CD ladder is, the different types of CD ladders and how to create one not forgetting how to spread the deposits.

You also know what to look out for when investing in CDs including the interest rates offered and your mode of savings to avoid a cash crunch. With this information, you can make an informed decision whether CDs are good for you.

Copyright © 2019 | All Rights Reserved