MagnifyMoney 
Clever savers sometimes structure their certificates of deposit (CDs) as a CD ladder to lock in higher rates while keeping their money more accessible. CDs are timed deposits whose interest rates are guaranteed until they mature — however, you can receive a penalty for withdrawing early.
CD laddering divides your deposits into several smaller CDs, so you can access your funds more frequently. This strategy offers more flexibility than a single, standard CD.
Read on to learn more about how to create a CD ladder, the positives and negatives of them and potential alternatives for your savings.
CD laddering is a strategy that staggers the maturity dates of multiple CDs, ensuring consistent returns on a quicker timeline.
Suppose you put your money in five CDs of different lengths instead of one 5-year CD. You could then withdraw some of your funds multiple times over the course of five years without penalty instead of waiting the full five years to withdraw your entire deposit.
CDs are deposit accounts that sacrifice liquidity for higher annual percentage yields (APYs) than traditional savings accounts. If you know you won’t need to access your funds in the short term, you can choose to lock away a portion of your savings in a CD. Unlike other deposit accounts or many investments, CDs guarantee a specific yield, so you won’t need to concern yourself with how future rates may rise and fall.
Instead of opening a single CD, open several CDs. Each CD should have a fraction of your deposit with a different term. For example, you could open five CDs with terms ranging from one to five years.
Once each CD matures, it should be renewed at the longest term of the ladder — in this example, that’s five years. This means a fifth of your initial deposit (plus interest earned on the balance) would be available for withdrawal each year.
You can open CDs in your CD ladder at different financial banks or credit unions to chase the best rates for each term, or open them all at a single institution for simplicity and convenience. Many brokerage firms also offer brokered CDs, so you can open and maintain a CD ladder in your brokerage account as well. And whenever a CD in your CD ladder reaches maturity, you can always close it and open one at another institution if you want to maintain the best rates.
Suppose you have $100,000 you’d like to stash away in a low-risk savings vehicle for a while. With a standard CD ladder structure, you could save your money this way:
This spreads your money out so you can withdraw a portion without penalty each year. If you had opened a single 5-year CD with all $100,000 instead, all your money would be locked up for five years.
With this example, over time, each CD becomes a 5-year CD. Continue to renew the CDs at that length for as long as you want to keep your CD ladder going.
Although you can set up a CD ladder for any length of time, sometimes you might want more flexibility for possible withdrawals. In this case, you could set up a mini-CD ladder, which matures on a faster schedule.
Here’s how you could structure $100,000 into a mini-CD ladder:
Instead of being able to access your funds without penalty once per year, you’d be able to withdraw $25,000 (plus interest) every three months.
Mini-CD ladders sacrifice the higher interest rates that come with longer CD terms for more liquidity. However, note that yearslong CD terms are also much more common than monthslong terms.
With a barbell CD, you split your deposit between short- and long-term CDs and renew your CDs when they mature. However, unlike CD ladders, you’d split your initial deposit in half instead of into several smaller deposits. You also wouldn’t open medium-term CDs.
Here’s how you could structure $100,000 into a CD barbell:
By putting half your money into CDs at each end of the term spectrum, the structure resembles a heavy barbell — with the weight on each end.
If you choose to renew 6-month CDs in perpetuity, you have more opportunities to withdraw your money. However, if interest rates are much higher than when you initially opened your accounts, you can choose to renew the 6-month CD into a longer-term CD to earn more interest.
Here are some of the key benefits of CD laddering, as well as some of its drawbacks.
| Pros | Cons |
|---|---|
| CD ladders offer more frequent opportunities to withdraw money | CD ladders still have some limits as to when you can withdraw your money |
| CDs provide better interest rates on average than savings accounts | CD ladders could have a lower overall yield than a single, longer CD |
| CDs ensure a guaranteed interest rate and return on your deposit | Interest rates could rise with your CD funds locked into a lower rate |
Similar savings and investing strategies have some key differences relative to CD ladders. Here are your options if you’re looking for an alternative:
CDs are useful for savers who want higher interest rates and don’t need short-term liquidity. They’re a safe, conservative way to store money, though you could lose out on some of the interest you’ve earned if you needed to withdraw money on short notice.
CD ladders offer more flexibility than a single CD, giving you more liquidity — at the cost of potentially higher returns. There are still early withdrawal penalties, but you’ll be able to access a portion of your funds more regularly.
If you’d like to take advantage of the higher interest rates on CDs while building in more flexibility when you can withdraw your money penalty-free, CD laddering is a good strategy for deposits.
You can choose however many CDs you’d like to include in your CD ladder. It may depend on how often you’d like to be able to make penalty-free withdrawals or what portion of your funds you’d like to be available at each maturity date.
You can open as many CD accounts as you want, either through your preferred financial institution or many different ones.
Alex Cook
