CD Ladder: What It Is and How You Can Use One to Build Wealth

Sometimes it takes a bit of creativity to maximize our wealth — like building a ladder of high-interest accounts.

A CD ladder is a creative savings strategy that allows you to reap the benefits of holding long-term accounts that pay high interest, while also holding shorter-term accounts with more liquidity.

This strategy appears more complicated on the outside than it actually is, so here’s the breakdown. 

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What Is a CD Ladder?

A certificate of deposit (CD) is a type of savings account that offers a high fixed interest rate for a set term. 

You can think of CDs as a locked savings account, where you can’t easily access the funds before the term is up. If you need the funds sooner, you will likely have to pay a penalty or forfeit your interest earnings. 

But, because you are locking your funds in for a guaranteed period, banks will pay you more interest than they would on a regular savings account.

Building a CD ladder is when you deposit cash into multiple CDs with different maturity dates, typically varying in both long- and short-term.

This strategy allows you to take advantage of the higher interest rates that often come with more long-term CDs, while also giving you more immediate access to the shorter-term CDs that mature (bankers' speak for “when the term ends”) faster.

I like to think of it as climbing a ladder. At each step of the ladder, you have a CD that matures at a different time. The further up the ladder, the more money the CDs are earning but the further you are away from having that cash immediately.

How To Build a CD Ladder

Building a CD ladder is a two-step process: You first open staggered CDs, then withdraw or re-deposit over time.

1. Open your CDs 

Let's say you have $5,000 to invest. 

You would begin by splitting the $5,000 evenly among multiple certificates, each with different term lengths. This way, the maturity dates are staggered. 

1. Deposit $1,000 into a 12-month CD
2. Deposit $1,000 into a 24-month CD
3. Deposit $1,000 into a 36-month CD
4. Deposit $1,000 into a 48-month CD
5. Deposit $1,000 into a 60-month CD

Typically, the shorter the term period, the lower the interest rate, and the longer the term period, the higher the interest rate — although this isn’t always the case.

For example, as of November 2024, Discover Bank offers a rate of 3.80% on its nine month CD. That's a great rate without the risk of being locked in for too long. Bread Savings also has its highest rate on a one-year CD.

A basic CD ladder structure tends to follow a five-year period with five separate CDs, but you can repeat the same structure with other intervals. 

For example, you may opt to have five CDs that mature every six months instead of every year. This makes your total ladder period 6, 12, 18, 24, and 30 months respectively. 

2. Redoposit the funds when the CDs mature

When your first 12-month CD matures, you have two options:

1. You can cash out the CD, collecting the initial money and the interest you earned over a year.
2. You can continue building your ladder. To do this, you’ll redeposit the $1,000 (and the interest earned over a year) into a new five-year (60-month) CD. 

If you continue to build your ladder, you will have a new CD that matures every year, considering a year has passed and your original five-year CD now has four years left until maturity. 

Whether or not you decide to continue building your ladder is up to you. Current interest rates may be the biggest factor in your decision. But, depending on your financial situation, you may need the cash now. 

READ MORE: Short-Term vs. Long-Term Financial Goals

You could also opt for other savings options, like opening a high-yield savings account or investing with a brokerage account. These are good options if your savings goals have changed or you want the ability to access your funds quicker. 

For example, the SoFi Checking and Savings Account offers up to 4.00% APY with no minimum balance required — and your money won't be locked in like it would be with a CD.

Pros and Cons of CD Ladders

A CD ladder can be an effective way to strike a balance between liquidity and higher returns, while also being low-risk investments. But they do have some drawbacks, unfortunately. 

Pros

• Regular access to funds: Depending on the structure of your ladder, you can access your funds at even and regular intervals. 
• Earn higher interest rates: CDs, especially longer-term ones, tend to pay higher rates than savings accounts. 
• Flexibility: You can decide how exactly you want to split up your funds and if you want to redeposit them when the accounts mature. 
• Low risk: If you open your accounts with a bank, they will be FDIC-insured up to $250,000 per depositor, per relationship type. 
• Guaranteed and predictable payments: Your interest rate is typically fixed, so you are guaranteed to earn a locked rate even if current interest rates go down.

Cons

• Requires active tracking: Managing a CD ladder can be time-consuming and even complex. You are tracking multiple maturity dates while monitoring the current interest rate climate.
• Limited liquidity: Even with staggered maturity dates, each CD is generally inaccessible until it has matured. If you withdraw your funds early, you will incur penalties.
• Opportunity cost: Locking your funds into CDs could potentially lead to missing out on higher returns from other investments. Stocks, bonds, mutual funds, and ETFs typically average higher annual returns than CDs.
• Interest rate risk: Your interest rates are fixed with a CD, so you could miss out on higher returns if rates rise.    

READ MORE: Are CDs Worth It?

Other CD Ladder Structures

There’s more than one way to build a CD ladder. Here are some different strategies that may work for your goals. 

Short-term CD ladder

Locking your money in for five years can be nerve-wracking. If you don’t want to commit to traditional longer-term CDs, you can explore a short-term CD ladder. 

Also called mini CD ladders, these ladders can be built similarly to a traditional ladder but with shorter terms. 

For example, you can do four CDs, but in shorter terms, maturing every three months or so: 3 months, 6 months, 9 months, and 12 months. 

Short-term CD ladders provide more frequent access to your money and more flexibility to reinvest at higher rates. They are also a good trial for you to get started!

Stepping-stone CD ladders

To create a stepping stone ladder, you start with short-term CDs and, over time, reinvest into longer-term CDs as the short-term ones mature. 

The purpose of this structure is to allow gradual adjustments to rising interest rates over time — and to step your way into maintaining a successful ladder.

You can try starting with six-month intervals and then reinvest in longer terms, like one-year, two-year, or five-year.

Staggered CD ladders

A staggered CD ladder is essentially an uneven ladder. 

Also known as uneven splits, these types of ladders most commonly spread different sums of money into the CDs, instead of depositing even amounts in each account. Typically, the term periods are also non-uniform and not evenly incremental.

This is a bit more complex as it involves understanding interest rate trends and projections. 

For example, if interest rates were actively rising, you would deposit a larger sum of money into a shorter-term certificate, so that as it matures, you could keep re-depositing into higher-rate accounts. 

Then, as rates drop, you’d snag longer-term CDs, so you could lock in high rates and avoid the drop.

FAQs

Is a CD ladder a good investment?

CD ladders can be good investments if you want predictable returns and regular access to your funds. They’re also good investments if you have a lower risk tolerance and are unable to handle unpredictable returns from more volatile investments.

However, CD ladders may not be suitable if you’re looking for more liquidity and higher returns.

Are CD ladders safe investments?

CD ladders are very safe investments because the returns are guaranteed from the fixed interest rates. CDs are also deposit accounts insured by government agencies. 

If you open your CD at a bank, you will be insured by the FDIC (Federal Deposit Insurance Corporation). If you open your CD at a credit union, you will be insured by the NCUA (National Credit Union Administration). 

Both of these agencies are government-backed and insure your funds up to $250,000 per depositor, per relationship type (this means a joint account gets more insurance.)

TL;DR: Is Laddering CDs a Good Idea?

CD ladders are a creative and somewhat unique way to take advantage of the high interest rates offered on CDs. 

You split a sum of money into multiple CD accounts, each set at a different term. When the CD matures, you can then redeposit your funds in a new CD or keep the cash, depending on the current interest rates.

CD ladders offer decent liquidity, low risk, flexibility, and guaranteed payments while earning higher interest rates. They do have a few drawbacks, though, as they require a lot of maintenance, don’t have the highest liquidity, and can cause you to miss out on higher-performing investments. 

For more tips on how to best manage your money, check out these episodes of the Erika Taught Me podcast:

• How To Budget for Beginners
• How to Become Better With Money
• Why Getting Rich is Easy And Being Patient is So Hard

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