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What is a CD Ladder?

A CD ladder involves taking out a series of certificates of deposit (CDs) with staggered maturity dates. Find out how they work and when you might want one.

January 25, 2022

The information provided is for informational purposes only and should not be considered financial advice. Consult with a financial professional to determine what may be best for your individual needs. 

A certificate of deposit (CD) is a bank-issued financial product that lets you earn a guaranteed amount of interest on a lump-sum deposit. In exchange, you have to lock in your principal with the bank until the CD matures.

If you’re wondering what a CD ladder (or laddering) is, it’s a strategy that involves opening multiple CDs with staggered maturity dates to get consistent cash flow, ideally at a higher rate of return than an individual CD or savings account could produce.

Here’s what you should know about CD ladders, including:

  • How they work

  • How to build one

  • When they’re a good idea

What is a CD ladder?

CDs require that you invest your deposit for months or years to get your return. In general, the longer you leave cash in the CD, the higher your rate of return. Take your money out early and you'll pay a fee that could erase your earnings.

That typically pressures you to choose between:

  • Short-term CDs that let you access your cash more easily but earn a lower return

  • Longer-term CDs that limit the use of your funds for extended periods but offer higher interest rates

CD laddering is a strategy that gives you the best of both worlds. It involves taking out multiple CDs with staggered maturity dates and working your way up to accounts with the lengthiest terms and the highest interest rates. Because the CDs mature in intervals, you still have regular access to your cash.

How CD ladders work

To start a CD ladder, you’ll need enough cash to open multiple CDs. Though it's not a universal practice, some banks have minimum deposit requirements. They’re usually somewhere between $500 and $2,500.

That shouldn’t be much of an issue in practice. At most historical CD rates, building a ladder usually isn’t worth it without more than a few thousand dollars to deposit anyway.

What is a CD ladder example, you may be wondering? Well, in November 2021, 5-year CDs had a nationwide average return of 0.24%. At that rate, if you deposited $2,500, it would only net you $6 per year.

If you have the minimum deposit necessary, you can structure a ladder to pay out in just about any interval you might need. Banks typically offer CDs with the following terms:

  • Three, six, and nine months

  • One, two, three, four, and five years

Building a ladder usually means relying on CDs with shorter terms and lower interest rates to cover yourself until the first long-term CD matures. As each shorter-term CD matures, you reinvest the funds into the longest-term CD.

How to build a CD ladder

Laddering may sound complicated in theory, but it’s pretty straightforward in practice. Here’s a CD ladder example to help you understand how it all works.

Say you have $15,000 in cash and you want to use it to build a CD ladder that pays out once a year. Initially, you could split up your finds like this:

  • $3,000 in a one-year CD at 0.50%

  • $3,000 in a two-year CD at 0.60%

  • $3,000 in a three-year CD at 0.70%

  • $3,000 in a four-year CD at 0.80%

  • $3,000 in a five-year CD at 1.00%

That way, you’d have a CD maturing every year for the first five years. The first four would earn a lower interest rate, but you’d reinvest the funds into a five-year CD as they mature.

Once you reinvest the fourth CD into a five-year CD, you’d have five $3,000 CDs earning interest at the highest possible interest rate, with one maturing every year.

You could continue to reinvest the principal and interest your CD ladder generates into five-year CDs indefinitely. Or, if you ever needed the cash, you’d have access to $3,000 plus interest each year without penalty.

Benefits of a CD ladder

The primary benefit of a CD ladder is that it exposes your principal investment to as little risk as possible while providing a higher return than other safe, single-deposit investments.

For example, banks usually offer a higher return on their long-term CDs than they do on their savings accounts because they don’t have to worry as much about you taking your money out with the former.

While the lock-in period of CDs presents a potential liquidity issue for you, CD laddering helps reduce that downside. Unless you need all your money at once, a ladder should provide all the cash flow you need.

In addition, because ladders let you reinvest in new CDs regularly, you reduce the likelihood that you’ll miss out when interest rates go up. Conversely, if you kept all your funds in a single CD for five years, you wouldn't be able to use those funds to take advantage of any opportunities that arise during that period.

When is a CD ladder a good idea?

CD ladders are FDIC insured, which means your principal investment and rate of return are as guaranteed as they can be. Ladders also provide a regular influx of liquidity as each CD matures.

As a result, a CD ladder is worth considering when your goal is to preserve your capital and generate steady cash flow. For example, you might use a CD ladder to provide liquidity as you transition into retirement or protect an emergency fund from inflation.

However, while CD ladder rates are usually higher than you could get with a savings or money market account, they won’t come anywhere near the return on the stock market. Their rates might not always even outpace inflation, so consider your alternatives before going to the trouble of building one.

If you’re looking to build a CD ladder, you’ll need a sizable lump-sum deposit to get started. Tally† can help you save money faster by refinancing your credit card debt into our low-interest line of credit. Give it a try today.

​​†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.