CD Ladder Basics

Manage your Cash Flow and Adjust to Changing Rates

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A CD ladder is an investment strategy where you buy several CDs that mature over several years. By "laddering," you make sure that some of your money is available periodically, and you reduce the chances of locking everything up in a CD when rates are at their worst.

What is a CD Ladder?

A CD ladder is a group of CDs organized to mature over time. Imagine a ladder with 10 steps, and each step is farther away from the ground.

With a CD ladder, you have a series of CDs maturing further and further out in time.

You might take $400 to the bank and build a CD ladder with the following 'rungs':

  • 1 year CD - $100
  • 2 year CD - $100
  • 3 year CD - $100
  • 4 year CD - $100

Each year (after the 1 year CD matures, for example), you reinvest the proceeds into the longest maturity. In this example, you extend your CD ladder by buying another 4 year CD.

Why Use Ladders?

People use CD ladders for flexibility and simplicity. They make CD investing easy, and they reduce the likelihood that you’ll have too many eggs in any one basket.

For example, your money is locked up in CDs. What if you discover upcoming expenses and need to spend some of that money -- expenses that might have been unexpected, but aren't due for a few more months. If you can wait just a bit, one of your CDs will mature soon, and you'll have access to the cash without paying early withdrawal penalties.

In another example, you might come into a lump sum of money and decide to invest in CDs. If you put it all into long term CDs when interest rates are low, you're stuck with those low rates -- even if the bank raises rates on new deposits. By laddering, you leave your options open (but this backfires when rates fall -- see below).

For more details on why CD ladders are popular, see Why Use CD Ladders?

CD Ladder Length

How long should your CD ladder go? It depends on what you’re trying to accomplish. Most people stop at 3 to 5 years. CDs with long maturities pay higher rates, so a longer CD ladder should earn you a little bit more. However, you have to be comfortable with locking the money up, and you should speak with a Certified Financial Planner to explore what long term options best fit your goals.

How Far Apart?

You also have to decide how far apart each rung should be. Should you use 3 month CDs or 2 year CDs? Most people settle on 6 month or 1 year maturities within a CD ladder. If you go any shorter, the CD ladder becomes high maintenance (and you're less likely to keep it going). However, you can get creative with CD ladders to accomplish any goal you have.

When CD Ladders are Bad

CD ladders are a great way to invest in CDs. However, you should avoid them if you can’t stick with the program over the long term. If you think you’ll have to break down the ladder, any early-withdrawal penalties might more than wipe out the extra interest you earn. Just use a savings account or a money market account instead.

You should also avoid CD ladders (or keep them short) if you know that interest rates will rise in the future.

The point of using CD ladders is to avoid thinking about these things, but there may come a time when you can reasonably predict what CD interest rates will do.

Alternatives to CD Ladders

If you decide not to use a CD ladder, where else can you put cash? Savings accounts are a good alternative. Online banks may pay as much as some CDs. You might also look into ‘rewards’ or interest checking accounts, which pay high interest on liquid cash.

The problem with these alternatives is that you don’t get a guaranteed rate. Interest rates will fluctuate, and if they head down then you might have been better off in a CD.