What is a CD ladder?

A certificate of deposit (CD) account may offer higher interest rates than a standard savings account, but, if you need to access your money before the CD term is over, you may receive an early withdrawal penalty fee. Some financially savvy savers are turning to a savings strategy that might give them the best of both worlds: a CD ladder. A CD ladder is a savings strategy that splits your money across multiple CD accounts with varying term lengths. Let’s learn more about this potentially valuable tool.

How does a CD ladder work?

With a CD ladder, you may be able to leverage the higher interest rates offered by longer-term CD accounts while maintaining periodic access to your money. The idea is to split your money into several CD accounts with staggered term lengths. This provides flexible access to savings through shorter-term CDs while leveraging the generally higher interest rates of longer-term CDs. Each time a shorter-term CD matures, you can mobilize those funds for personal financial goals or choose to reinvest them into a new CD with a longer term.

When reinvesting money from short-term CDs, you’re moving the principle plus accrued interest into a new CD, ideally with a longer term and higher interest rate, compounding your interest earned over time.

A CD ladder can be useful for saving towards long-term goals while providing semi-regular access to deposited funds. Because you know when each CD is set to mature you can plan accordingly if you need access to cash or wish to renew the CD for savings growth.

How to build a CD ladder

Now let’s look at how to build a CD ladder and some helpful tips for getting the most out of this potentially useful savings method.

Identify your goals

Before embarking on any CD ladder strategy, it’s important to understand your goals and current finances. Do you, for example, foresee any major expenses coming up next year? Maybe you have a personal goal, such as purchasing a new car in five years or owning your home in ten. Knowing your milestones can help you determine what term lengths might suit you best.

This may also mean crunching some numbers and calculating what you have to build a CD ladder that empowers your savings while allowing for periodic access to your funds. Your timeline, risk tolerance and the amount of money you have to build a CD ladder may be worthwhile considerations at the outset of any CD ladder strategy.

Choose your CDs

The next step in your CD ladder strategy is to highlight CDs that align with your financial goals. This means researching which banks have the types of CD accounts that suit your needs.

Review terms and conditions

Additionally, as with any bank account, fully understanding the terms and conditions of each CD can help you make well-informed financial decisions. Some CD accounts may charge a maintenance fee. Others may have characteristics like variable interest rates or no withdrawal penalties. Some may be FDIC-insured. Contact your financial institution to determine if they and their CD accounts are FDIC insured. Checking with your financial institution and knowing everything you can before opening the account may help prevent any unexpected surprises while scaling your CD ladder.

Decide how you will divide your funds

The next step is to determine how much money you want to deposit into your CD ladder. Once you’ve chosen an amount that fits your budget and suits your timelines, decide how you’d like to divide it between your CDs. Some might choose to divide their investment by the total number of laddered CDs, distributing funds equally. Others may allocate their funds based on other variables, such as term length or the rate of an individual CD.

Start climbing

Now it’s time to open the accounts. Gather everything you need to open a bank account, and remember that fully understanding how each CD works and all fees associated with them can help keep you informed.

Watch your progress

As each CD matures, you can choose to reinvest the money in a new CD or withdraw it at the end of its term without incurring a fee.

In summary

What is a CD ladder? A CD ladder is a savings strategy that may help you take advantage of long-term CDs’ higher rates while still having periodic access to savings. It starts with identifying how much money you have to save now, how much you want to have later for financial goals and then building the CD ladder that can help get you there.