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A certificate of deposit (CD) can be a great way to build savings, but these accounts can’t always keep up when inflation is on the rise. However, CD laddering aims to address this problem. Here’s what you need to know about how CD laddering works, how to build a CD ladder and some alternatives to CDs you can also consider.

What Is a CD Ladder?

A CD ladder is a type of savings strategy where you spread your cash investment among multiple CDs instead of depositing a lump sum into a single certificate of deposit account.

An important component of a CD ladder is staggering your CD maturity dates. The point of a CD ladder is to have your funds become available to access or reinvest at different dates.

Many savers who use CD ladders hope that when their various CDs mature, a higher interest rate will be available. If that happens, the saver would have the opportunity to reinvest their funds into a CD with a higher annual return—but there’s no guarantee interest rates will rise.

Benefits and Risks of CD Ladders

If you’re considering building a CD ladder, consider their pros and cons.

CD Ladder Pros

  • Avoid the risk of tying up cash for a long time and missing out on potentially rising interest rates
  • Improve cash liquidity with access to portions of your savings at regular intervals without early withdrawal penalties
  • FDIC insured up to $250,000 as long as the bank is a member of the Federal Deposit Insurance Corporation

CD Ladder Cons

  • Could miss out on higher interest rates on a long-term CD with the full amount of your cash savings if rates decline
  • Less flexibility than high-yield savings accounts
  • Low-risk investment, but it might be possible to earn higher returns elsewhere

How to Build a CD Ladder

CDs come with varying terms, typically from a few months up to five years. So, when you build your CD ladder, you can choose varying maturity dates.

In general, long-term CDs have higher interest rates, but it’s increasingly common to find attractive annual percentage yield (APY) offers from online banks and credit unions for shorter terms.

CD rates also vary by bank, so it’s wise to shop around and compare CD offers—especially when you’re using the CD ladder strategy to try to take advantage of the highest rates possible.

CDs to Consider

Recommended CD Accounts

Account 1-Year APY 3-Year APY 5-Year APY Learn More
CIT Bank logo

CIT Bank Term Certificates of Deposit

0.30% More Info

Annual Percentage Yield is accurate as of April 2, 2024. Interest rates for CIT Bank's term CDs are variable and subject to change at any time without notice

0.40% More Info

Annual Percentage Yield is accurate as of April 2, 2024. Interest rates for CIT Bank's term CDs are variable and subject to change at any time without notice

0.50% More Info

Annual Percentage Yield is accurate as of April 2, 2024. Interest rates for CIT Bank's term CDs are variable and subject to change at any time without notice

Capital One 360 Certificates of Deposit

4.80% 4.00% 3.90%
Marcus by Goldman Sachs logo

Marcus by Goldman Sachs High-Yield Certificates of Deposit

5.00% 4.15% 4.00%
Discover Bank logo

Discover Certificates of Deposit

4.70% 3.75% 3.75%

Quontic Bank Certificates of Deposit

4.50% 4.40% 4.30%

CD Ladder Example

Let’s assume you have $30,000 to invest. Below is a hypothetical example of how you could use a CD ladder to open three accounts and stagger your savings among multiple certificates of deposit.

CD Term Amount APY

CD 1

6 Months

$10,000

4.15%

CD 2

1 Year

$10,000

4.30%

CD 3

18 Months

$10,000

4.47%

In this example, one of the CDs in your ladder matures once every six months. At each maturity date, you gain access to $10,000 of your savings, plus the interest you earned on your funds.

When each CD in your ladder matures, you have the opportunity to reinvest as you see fit. And if interest rates are higher than when you started this process, you can take advantage of them by opening a new CD and extending the height (and value) of your CD ladder.

Make sure you keep track of the maturity dates for all your CDs as they may automatically roll over soon after. If this happens, you won't have the opportunity to compare rates and potentially move funds to a stronger CD.

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Alternatives to CD Ladders

Here are two other low-risk ways to earn more money on your savings you can consider if you’re not sure CD laddering is right for you:

  • Bump-up CDs: Some banks and credit unions offer bump-up CDs. When you open one, the bank allows you to increase or “bump up” your APY if interest rates rise during your CD’s term. In general, you can only raise the APY once. So it’s important to choose your timing wisely.
  • No-penalty CDs: In general, no-penalty CDs don’t offer the highest rates available. However, they can provide you with the flexibility to withdraw funds early without penalty if needed.
  • High-yield savings accounts: If you still want high rates but prefer to have more access to your funds, a high-yield savings account can offer the best of both worlds. Many high-yield savings accounts these days can offer well over 5.00% APY.

Bottom Line

There are many ways you can try to grow your cash to support your short- and medium-term savings goals. If you believe a CD ladder makes sense as part of your overall savings plan, be sure to shop around for the best CD rates available from various financial institutions (including online banks).

ML

Michelle Lambright Black

Michelle Black is founder of CreditWriter.com and HerCreditMatters.com. Michelle is a leading credit card journalist with over a decade and a half of experience in the financial industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting, small business, and debt eradication. Michelle is also a certified credit expert witness and personal finance writer.