What is a CD ladder? Your guide on how to build one

Savings strategies are always a balancing act between risk management and growth opportunity. One way to straddle this line is by investing in multiple certificates of deposit (CDs) with different maturity dates. Called “CD laddering,” this approach is a great way to take advantage of the higher interest rates that typically come with longer-term CDs while still ensuring you have intermittent access to your money. Hence the “ladder” analogy … the CD on the lowest “rung” will always be closest to maturity, while higher-rung CDs have longer terms.

If you’re looking for competitive CD rates with guaranteed returns, look no further than Discover® Bank. We offer a range of high-yield CDs with terms as short as three months and as long as 10 years. You can open a Discover CD with no minimum opening deposit required, and your deposits will be FDIC-insured up to $250,000 per depositor, per insured bank, per account ownership category. You have 45 days after account opening to fund the CD.

What is a CD ladder?

A CD ladder is a series of CDs—typically a minimum of three—that are set to mature (complete their term) at regular intervals. William Stack, owner of a financial services firm based in Salem, Missouri, says CD ladders can be particularly advantageous in a rising interest rate environment. “By breaking large CDs into smaller ones maturing at different times, you can earn progressively higher interest rates as CDs mature,” he says.

How to build a CD ladder

“It’s easy to set up,” says Jonda Lowe, president of a financial services firm based in Huntington, West Virginia. Begin by opening several certificates of deposit with varying terms. Many banks let you complete the process online, but if you need additional help, a banker or broker can create a CD ladder for you.

To design your ladder, you’ll have to decide on the overall length of your ladder (or the duration of the longest-term CD) and the length of time between each CD’s maturity date.

While staggering maturity dates by one year is common, you could set your CDs to mature at intervals of your choosing—every six months or two years, for example. Regardless of the CD ladder length you ultimately want to create, when you begin to build it, you’ll initially have to purchase several shorter-term CDs.

If you don’t expect to need the money on short notice, a less frequent maturity cycle could be appropriate. But if you need a portion of the money quickly (let’s say that a financial emergency hits), shorter maturity intervals would give you more immediate access to some of the funds, which could spare you from an early withdrawal penalty.

Examples of a CD ladder

Lowe gives an example of how to build a five-year CD ladder with five $20,000 CDs. Initially, the ladder would look like this:

• $20,000 in a 12-month CD
• $20,000 in a 24-month CD
• $20,000 in a 36-month CD
• $20,000 in a 48-month CD
• $20,000 in a 60-month CD

Each year, one of the CDs will mature, at which point you could either withdraw the money or reinvest it in a new 5-year CD. The second option keeps the CD ladder going so the money continues to earn interest.

If you build a CD ladder modeled after Lowe’s and open new 60-month CDs as the original ones mature, your ladder will consist of five 60-month CDs after four years. This is the sweet spot: You’re earning the higher CD interest rates common among longer-term CDs—but with regular access to your money—and you are positioned to take advantage of higher interest rates every year (if they’re available) as you open new CDs.

Benefits and uses of a CD ladder

One of the benefits of a CD—and CD ladders in particular—is that they can come in all shapes and sizes. You can adjust a CD ladder’s length, term, and maturation frequency to align with your financial goals, like building up your emergency savings or prepping for a big-ticket purchase.

Just keep in mind that CDs typically come with early withdrawal penalties, which can potentially wipe out your returns if you need to take the money out before the term is up. So, make sure the maturities you select work with your cash needs.

If you want ready access to at least some of your funds, it may make sense to hold some cash in a high-yield Money Market Account. You’ll still earn competitive yields and enjoy access to your savings in a pinch, but you’ll avoid having to withdraw from your CDs.

Here are a few popular uses for a CD ladder:

Emergency fund

You can use a CD ladder to start an emergency fund by structuring it to mature in monthly increments and putting an average month’s expenses in each CD. You can reopen CDs as they mature, or the bank may be able to automatically open them for you. If an emergency arises, you’ll have a steady stream of maturing CDs to cover your expenses.

Tip: It may be worth setting aside at least a portion of your emergency stash in a checking account or savings account for quick access.

Big-ticket purchase

Your approach may be different when creating a CD ladder for a specific purchase. You could build your initial CD ladder in the same way described above, but when each CD matures, you won’t reinvest the money in a new 5-year CD. Instead, you would open a CD that matures within your overall savings time frame. If you are still a few years away from the new home, for example, your new CD could have a 48-month term; if you’re three years out, 36 months, and so on.

College expenses

Consider creating a CD ladder to help cover college expenses, timing it so that a CD will mature at the start of each semester or school year. Or, as your child nears college age—perhaps three or five years out—you could build a CD ladder to help keep their education fund growing and secure.

Remember the current interest rate environment

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When determining how to build a CD ladder to meet your financial goals, consider the current interest rate environment, as locking your money up could mean taking on liquidity and interest-rate risk. For example, in an environment where interest rates are expected to drop, Stack says it might make more sense to lock in the current interest rate with long-term CDs versus creating a CD ladder.

Lowe seconds this opinion. “When rates are expected to stall or drop, CD ladders can cost you money,” she says. In this scenario, each time one of your CDs matures and you put your funds back into a CD, you might be locking in a lower—and less lucrative—interest rate.

Finding your fit with Discover

A certificate of deposit can be a dependable financial tool that may work well if you’re looking for a low-risk way to save your money and earn a predictable return.

In addition to offering a range of CDs to help you build your CD ladder, Discover offers other attractive savings options: Money Market Accounts where you can enjoy competitive returns with easy access to your cash, Online Savings Accounts to assist with your short-term savings goals, and IRA CDs to help you grow your retirement savings. 

Open an account online. Or call our 24-hour U.S.-based Customer Service at 800-347-7000.

Now that you’ve learned how CD ladders can help you grow your savings, you might want to consider the merits of money market accounts vs. CDs.

The article and information provided herein are for informational purposes only and are not intended as a substitute for professional advice.

Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third party or information.