How to Build a CD Ladder for Your Emergency Fund

This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment advisor before making investment decisions.

If you’ve worked to build up an emergency fund, you may be curious as to where you should park the cash. There are a few different options available, such as checking accounts or high-yield savings accounts.

One option that some people utilize is a certificate of deposit, or CD. A CD is a savings product typically offered by banks and credit unions. Utilizing a strategy known as “CD laddering” could be an effective way to earn extra interest on your emergency fund while also maintaining access.

In this article, we’ll highlight everything you need to know about how to build a CD ladder emergency fund. We’ll cover what certificates of deposits are, how CD ladders work, and how CD ladder emergency funds work.

Certificates of deposits — The basics

A certificate of deposit is a savings product typically offered by a bank or credit union. Two of the terms that you’ll see associated with CDs are interest rates and maturity dates.

Banks and credit unions typically offer higher interest rates on certificates of deposits than they do on things like savings accounts or checking accounts. The higher the interest rate, the more money you earn by leaving your cash in the account. You may see this expressed as your rate of return.

CDs are a bit different from savings accounts, however, due to the maturity date. This is the date at which you’re allowed to withdraw your funds without paying any penalties or fees. If you withdraw your money early, you will likely have to pay an early withdrawal penalty.

Financial institutions typically offer CDs based on their maturity dates. For instance, you may see options like:

• One-month CD

• Three-month CD

• Six-month CD

• One-year CD (or 12-month CD)

• Two-year CD

• Three-year CD

• Four-year CD

• Five-year CD

Typically, the CDs with the longest terms are the ones with the highest interest rates.

How do CD ladders work?

A CD ladder strategy calls for you to spread your funds across CDs with different maturity dates. For instance, let’s say that you have $10,000 that you’d like to put into CDs. An example of a CD ladder might be the following:

• Put $2,500 in a one-year CD.

• Put $2,500 into a two-year CD.

• Put $2,500 into a three-year CD.

• Put $2,500 into a four-year CD.

Once each CD matures, you will need to decide what you want to do with the money. One option may be to renew the CD. So if your one-year CD matures, you just keep the funds in the CD and renew it for another year. (Some CDs may even auto-renew.)

Another option is to put the matured funds into a new CD, essentially continuing the ladder. For example, once your one-year CD matures, your funds will look like this: 

• $2,500 plus interest earned in cash, which came about from the one-year CD maturing 

• $2,500 plus interest earned in your two-year CD; one year remaining to maturation 

• $2,500 plus interest earned in your three-year CD; two years remaining to maturation 

• $2,500 plus interest earned in your four-year CD; three years remaining to maturation 

You could take your cash from the one-year CD that just matured and put it into a new four-year CD so that your ladder still has CDs with one, two, three, and four years remaining. 

Furthermore, if one stage of your ladder reaches maturity and you realize that you need cash, you could opt for liquidity. Instead of rolling the cash into another CD, you could choose to keep cash on hand.

CD ladders can be an effective personal finance strategy because they offer more flexibility and liquidity than a single, longer-term CD. By tying yourself to a long-term CD, you are committing to making your cash inaccessible for a significant period of time, unless you’re willing to pay the early withdrawal penalty.

By utilizing a CD ladder, you can give yourself peace of mind knowing that your money will become more accessible in stages.

How do CD ladder emergency funds work?

A CD ladder emergency fund utilizes the strategy outlined above, but takes it one step further and applies it to your emergency savings. The one primary difference is that you will likely be focusing on shorter-term CDs than longer-term CDs.

For instance, in the example above, you put your money into CDs with year-long (or more) maturity durations.

With a CD ladder emergency fund strategy, you may choose to only focus on those CDs that mature in a few months, perhaps no longer than a year. By utilizing short-term CDs, you will gain access to your money every few months, which can help in case of emergency. If an emergency does not arise and your CD matures, you can reinvest the money back into a new CD.

The one potential downside to a CD ladder emergency fund is that you may need to pull all of your money in case of a dire emergency. In such a case, you will likely have to pay the early withdrawal penalty. These penalties often vary by institution, though there are federal laws in place that define the minimum penalties. There is no maximum penalty.

If you know you are going to use a CD specifically for your emergency fund, you will want to do research beforehand to determine what your potential fees may be for withdrawing funds.

How to build a CD ladder emergency fund

Let’s take a closer look at how to build a CD ladder emergency fund. Say that you have $2,000 in an emergency fund. You will spread your funds across CDs with different terms. That may look something like this:

• Put $500 into a one-month CD.

• Put $500 into a three-month CD.

• Put $500 into a six-month CD.

• Put $500 into a 1-year CD.

Spreading your money out this way ensures you have access to cash on a rolling basis to cover purchases, should it be necessary.

Other options to store your emergency funds

A CD ladder is a savings strategy that is worth considering for your emergency fund. CD rates could potentially offer higher returns than other interest-bearing options, like high-yield savings accounts and money market accounts.

However, it’s important to remember that the best CD rates typically are reserved for the CDs with the longest terms. If you are only utilizing CDs that mature within a couple of months, you may find that savings accounts or money market accounts offer higher yields.

Additionally, a CD ladder emergency fund requires active management. When your funds mature, you have to determine whether to renew them, put them into another CD or cash them out. Also, some CD’s may have auto-renewal, so you’ll want to be mindful of those dates if you’d rather cash out or open a new CD with the funds. 

This is noticeably different from savings accounts and money market accounts, where your money is much more accessible. You can immediately transfer the money into a checking account to pay for a purchase or pay off a large credit card purchase without having to worry about early withdrawal penalties.

In summary, a CD ladder emergency fund could offer the highest rates of return, but you’ll need to do your homework ahead of time. You may find that having your money more liquid in a savings account provides more peace of mind. A CD ladder could still be a part of your management strategy, perhaps if you’re focusing on a more targeted savings goal.

A CD ladder emergency fund is one potential savings option

When it comes to storing your emergency fund, there are a few different options available. One strategy worth considering is a CD ladder emergency fund.

CD ladder emergency funds require a bit of active management. However, if you learn how to build a CD ladder, you may find that you will earn more in interest. Typically, CDs offer the highest rates of return, though it depends on the maturation terms.

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