How to Create a CD Ladder

Creating a CD Ladder Can Maximize Earnings While Adding Liquidity

Image shows a nest with a golden egg in it, and a certificate of deposit beside it. Text reads: "How do CDs work? A kind of deposit account offered at almost every bank or credit union. Primary advantage is potential to earn more interest with a savings account. The longer the term, the better the interest rate. Once your CD matures, you can renew it at the current rate, withdraw your initial deposit along with the interest, or both"

Chloe Giroux / The Balance  

If you're looking for a low-risk way to invest, a CD ladder may be the answer. Creating a CD ladder can be a creative and simple way to take advantage of a traditionally safe investment product. By laddering your CDs, you can maximize your potential earnings and determine the frequency at which you'd like them available. Here's how to build your first CD ladder. 

How CDs Work

Certificates of deposit, or CDs (occasionally called term shares or term certificates), are a kind of deposit account offered at almost every bank or credit union. You open a CD account and deposit any amount between the minimum required and maximum allowed by the bank. The money stays put in your CD earning interest until it reaches its maturity date. 

The primary advantage of saving money in CDs is the potential to earn more interest than you could with a savings account. CDs can offer a variety of rates, depending on the type of CD, the amount you deposit, and the CD term. The longer the term, typically the better the rate.

Typical lengths offered are 3, 6, or 9 months, all the way up to 60 months (five years), and at some banks, you can find 10-year CDs. Minimum dollar amounts you can put into a CD are commonly $500, with bonus rates sometimes available for larger balances (such as $10,000 or more) or for more established customers/members.

Once your CD matures, you can renew it at the current rate, withdraw your initial deposit along with the interest, or both. If you decide to renew your CD, the bank may do so automatically and roll it into another CD with the same term as the old one. The rate would adjust to whatever the current rate is for that CD term.

Early withdrawals (meaning withdrawals before the CD matures) usually come with penalties from the earnings, but they can sometimes cost you some of your principal investment (although exceptions exist in hardships).

Like a savings or checking account, CDs are insured by the FDIC or NCUA so there's no worrying about a downturn in the economy causing losses--your rate is guaranteed for the length of the CD term. The interest earned is also typically compounded, which means it too can begin earning even more interest along the way, especially on longer terms. Be careful to watch the APY (annual percentage yield) and not the APR (annual percentage rate) as the APY is a more universal measuring stick of what you'll earn.

CDs are typically compounded monthly or quarterly. The frequency at which a CD compounds can make one bank's 2% give you more profit than another bank's 2%. To differentiate, federal law requires all financial institutions to use the annual percentage yield (APY) in addition to the rate (APR). This allows you to compare apples to apples when shopping for rates.

Laddering CDs

A CD's higher rates make it a more lucrative savings vehicle than a money market account, and its insured nature makes it safer than the stock market. But the money is not available or liquid (without penalty) until it matures at the end of its term. This is where a CD ladder becomes useful. It's not illegal or unethical; a CD ladder is simply an investment strategy.

Say you like a particular rate: 3.2% on a 60-month term CD, but you prefer to have at least some of the funds available annually. The 12-month term only earns .9% by comparison. You have $10,000 to invest and you feel you should be getting better than .9%, you just don't want to give it up for so long to do it. A CD ladder could be just the trick.

You open a CD for 60 months with $6,000, locking in a higher rate of 3.2%. But you take the remaining $4,000 and open four other CDs: one for 12, 24, 36, and 48 months. These are less than 3.2% but just wait. The first one for 12 months comes due next year when you wanted it available. You take what you need, if anything, and leave at least the minimum required and renew it for 60 months, which is now 3.1%. It's changed, but it's still the best rate. When the second year rolls around, and your second CD matures.

You then take what you need and renew it for 60 months as well, instead of its original 24. By this time, the current 60-month is offering 3.3%, an improvement. You do this every year, renewing the 36 and 48 month CDs to 60 months at whatever the current rate is knowing it's always higher than any shorter term. By the fifth year, you are renewing the fifth CD which was already 60 months to another 60. Who knows what the rates will be in five years, but you always know it's better than a 12-month term. Now all your CDs are locked in for a full five years, but a different one comes due every year making that money available penalty-free so you can continue with your ladder or use the funds for something else.

You effectively get the rates of a long-term CD with the availability of a shorter term. This simple magic is called a CD ladder. You can make your CD ladder broad like this one, or create one that matures every month. There's no limit to the quantity or the frequency in your CD ladder, as long as you meet the minimum deposit requirements of your institution. Each is still insured (up to $250,000 total per depositor) and each is locked away earning you the best rate.


Consider your goal in setting up a CD ladder. This type of savings approach may be more suitable for saving up for a vacation, a down payment on a home, or home repairs, whereas a savings account may be more appropriate for your emergency fund.

Shop Around Before Setting Up a CD Ladder

If you're creating a CD ladder, remember to do your homework first. Compare brick-and-mortar banks and credit unions with online banks to see where the best CD rates can be found. Remember also to read the fine print on early withdrawal penalties and other fees to ensure that you're hanging on to as much of your interest earnings as possible.