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CD ladder: What it is and how to build one

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What is a CD ladder?

A CD ladder is a savings strategy where you invest in CDs with staggered maturity dates so you can take advantage of higher rates on the longer-term CDs without committing all of your money to that one CD.

With this strategy, you’ll have funds become available more often than if you put all of it in a long-term CD.

How to build a CD ladder

Here’s an example of how to set up a CD ladder.

Let’s say you want to build a three-year CD ladder with three rungs. If you have $3,000 to invest, then you might choose to divide the funds equally into three CDs with different maturity dates:

When the first CD matures after one year, you can cash out or choose to reinvest it into another three-year CD that offers a higher yield than a one-year CD. Each of the other CDs that you originally opened will be one year closer to their maturity date. You would continue this process each year as long as you want to maintain the CD ladder.

You have the option to open CDs with the same amount of money in each or with various amounts of money.

As you build your CD ladder, you’re not under any obligation to open all of your CDs at the same institution. In fact, it’s a good idea to shop around for the best rates on each CD term.

Benefits of a CD ladder

  • CDs offer a guaranteed rate of return.
  • You can take advantage of higher rates on longer-term CDs without locking up all of your money.
  • If rates are rising, you can reinvest the money from the shorter-term CD.
  • You have easy access to your money if you need it (though you may be charged an early withdrawal penalty).

Drawbacks of a CD ladder

  • CD rates are historically low and may not keep up with inflation.
  • You could be missing out on higher returns from more aggressive investments, such as stocks or bonds.
  • If interest rates are declining, you might be reinvesting the ladder into lower rates when a CD matures.

Are CD ladders a good investment?

A CD ladder can help you build a predictable investment return. It also gives you the ability to potentially earn better returns than you would on a single short-term CD, as well as the ability to access a portion of your CD savings each year. The tradeoff is you could risk losing to inflation in the long term. Plus, you’ll potentially lose out on better returns offered by other investment vehicles with greater growth potential.

Consider your reason for opening a CD ladder before moving forward. It could be a great fit for your short-term savings goals. But a long-term savings effort might need an additional boost from other investment vehicles.

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Written by
Sarah Sharkey
Contributing writer
Sarah Sharkey is a contributing writer for Bankrate. Sarah writes about a range of subjects, including banking, savings tips, homebuying, homeownership and personal finance.
Edited by
Senior editorial director
Reviewed by
Senior wealth manager, LourdMurray