How To Build A CD Ladder | Easy Step-by-Step Guide

Want to learn how to put your eggs in different safe baskets that multiply and give room for reinvestment? Learn how to build a CD ladder today.

Putting all your funds in one CD increases your chances of missing out on a rise in interest rates that occur while your funds are locked away.

With a CD ladder, you can take advantage of short-term interest rates by reinvesting gains from maturing CDs into newer CDs with higher interest rates. On the other hand, if interest rates drop, you still enjoy the benefits of the high-interest rates that your existing long-term CDs provide. 

Before we show you how to build a CD ladder without stress, let’s get to define a CD Ladder while expounding the reasons why you should build a CD Ladder.

What Is A CD Ladder?

A CD ladder is an investment tactic that allows you to invest in various individual CDs with staggered maturity dates. In other words, it is a savings strategy to spread cash equally across various certificates of deposit in other to gain from higher rates accrued from long-term CDs while freeing up portions of that money at short-term intervals.

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For example, you could divide your money up equally to open a one-year CD, a two-year CD, and a three-year CD at the same time to build a three- year CD ladder.

An effective ladder strategy can maintain some liquidity while producing greater returns when compared to short-term CD rollover.

The invested funds, which are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC), are secured by the issuing bank until the maturity date of the CD.

Maturity dates for these savings instruments are normally set at three months, six months, one year, or five years. The higher the term for which funds are committed, the higher the interest accrued.

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Why Should I Build A CD Ladder?

A CD ladder helps one build a foreseeable investment return. Furthermore, it gives you the ability to earn better returns, unlike a single short-term CD.

By spreading your monies across various CDs, a CD ladder offers you flexibility. Part of your money becomes available each time one of your CDs mature. Additionally, you’re able to take advantage of rates on longer-term CDs, which are typically higher, without committing all of your money to that CD.

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How To Build A CD Ladder: Easy Steps

Building a CD Ladder isn’t difficult. You can even do it on your own by opening CDs of ranging terms. Many banks even let you finish the process online. If you need additional assistance, a banker or broker will always be there to assist.

Here are the steps to follow in order to build a CD Ladder:

Step 1. Open the initial CDs

A CD ladder requires splitting your investment evenly into several CDs of different term lengths with staggered maturity dates. A traditional CD ladder model has five “rungs” with CD terms that grow by one year up to five. If you had $10,000 to invest, you would disperse your money like this:

  • $2,000 in a one-year CD
  • $2,000 in a two-year CD
  • $2,000 in a three-year CD
  • $2,000 in a four-year CD
  • $2,000 in a five-year CD

Step 2. Renew each CD when it matures

As a CD matures, you can put the money into a new five-year CD. After five years, your ladder will have five five-year CDs, and one will mature each year.

Here’s how that would look:

  • $2,000 + one year of interest in a five-year CD
  • $2,000 + two years of interest in a five-year CD
  • $2,000 + three years of interest in a five-year CD
  • $2,000 + four years of interest in a five-year CD
  • $2,000 + five years of interest in a five-year CD

The flexibility always comes into play after each CD matures. Although a CD ladder works by reinvesting each sum into a new CD at least once, you might break up the ladder if rates are too low or your savings goals change. In that case, you might choose a different account for your funds, such as a savings or brokerage account.

What Are The Benefits Of Building A CD Ladder?

CD laddering provides the following benefits:

  • Increased accessibility: Your cash will be available to you at regular intervals. Remember that CDs have early withdrawal penalties if you break the seal before the term ends.
  • Flexibility: A CD ladder allows you to split up your investments and whether to reinvest each time a CD matures.
  • Better interest rates: With a CD Ladder, you’ll be able to choose longer-term CDs with higher rates and still have certificates growing on a regular basis. The longer a CD’s term — and sometimes the larger your deposit — the higher your rates.
  • It’s a win-win: If interest rates are high, you’ll have the cash to invest in new CDs. If rates go low, you still have money invested in long-term CDs that come with higher rates.
  • Predictability: CD’s are a good option for organizations who want safety and predictability.

Are There Disadvantages of Building A CD Ladder?

The main downside of a CD is that your earnings are streamlined and you could be missing out on earning a higher return in a more aggressive type of investment.

In as much as the interest rates of CDs go high, CDs are not known for offering the highest interest rates. So, if your goal is to earn bigger returns and build massive wealth, you might fancy considering other investment angles with bigger growth potential.

For instance, someone who wants to save for retirement will always go for a tax-advantaged account that invests in a diversified portfolio of stocks.

Can I Create A CD Ladder For A Midterm Goal?

Frankly, creating a CD Ladder is a long term investment strategy. This is because you’ll need to reinvest new savings and mature CDs throughout a period of years. So, if you intend to create a CD ladder for a midterm goal, you might have to reconsider.

For example, if you want to buy a house in five years, and you have $10,000 saved so far, consider putting $6,000 in a 5 year CD, and $1,000 in a 1-4 year CD. 

Each year, you will reinvest gains from maturing CDs into newer CDs with higher interest rates that will mature the year you need your savings. For example, after your first year, you will invest the $1000+ interest from your first CD and any new savings into a 4 year CD. 

After five years, all of your investments will mature at the same time, and you can buy a house.

Final Thoughts

A CD ladder is a fancy strategy that allows you to divide your CDs into different maturities. It enables you to benefit from the higher interest rates associated with longer-term investments and also grants you steady access to your money.

As such, CD ladders can be a great way for investors to plan for tomorrow or save up for big purchases.


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