How to build a CD ladder: Lock in high APY without losing complete access to your money

If you’re looking for a reliable and low-risk way to turn your savings into a profit-earning machine, you’ve probably considered some of the best certificates of deposit (CDs). CDs are an almost effortless way to steadily increase your savings by earning interest.

A CD ladder is a powerful strategy to maximize your CDs, making your investments more liquid while still providing you a solid return. If you plan to open multiple CDs, you should understand how to craft a high-octane CD ladder. Here’s what you need to know.

What is a CD ladder?

A CD is a type of high-yield savings account—but with a couple of advantages:

• Many CDs come with even higher APY than some high-yield savings accounts.

• A CD’s return rate is guaranteed for the duration of your account term. High-yield savings accounts can change their rate at essentially any time.

The downside is that CDs are considerably more restrictive than savings accounts. They come with the stipulation that you cannot withdraw your funds until the account term ends. For example, if you open a 12-month CD, you must not touch the money you’ve deposited for a year. If you do access it early, you’ll be hit with significant early withdrawal penalties.

A CD ladder is a way to keep you from completely losing access to your money for an extended period of time. It’s a savings strategy in which you open multiple CDs at different intervals. This allows you to choose a variety of high interest rates that can come with short-, medium-, and long-term CDs while preserving the ability to routinely access some of your cash.

Pros and cons of a CD ladder

Pros

• Low-risk investment
• CDs can often provide a higher APY than high-yield savings accounts
• Regular access to a portion of your funds

Cons

• Unable to touch your money penalty-free until account maturity
• Potentially difficult to juggle multiple account term dates
• Earnings may not always outpace inflation

How CD ladders work

CD ladders work by giving you staggered returns as your CDs expire sequentially. Again, a CD ladder allows you to reap the benefits of hands-off CDs while still being able to withdraw a chunk of your cash regularly.

Each different CD term you open is a “rung” on your CD ladder. You can either build one CD ladder for a set expense you know you’ll have in the future, such as a car payment or tuition bill, or you can reinvest the money to create an ongoing CD ladder that gives you a steady stream of interest over a years-long period.

How to build a CD ladder

The key to building a successful CD ladder is to open accounts that stagger in maturity.

For example, if you have $10,000 to invest, you could open eight CDs of $1,250 each that range from three months to four years. You may then open CDs of 6, 12, 18, 24, 30, 36, 42, and 48 months. This will give you access to a portion of your money every six months. When the first CD matures, you can reinvest it into a new 48-month CD to keep the 6-month maturity ladder going.

Your CD ladder strategy may vary. Just keep in mind the following steps when building your own CD ladder:

2. Decide how much money you can invest: Don’t part with money you think you may reasonably need before your account terms. Better to have the money you need than to have an overambitious investment plan.

3. Choose the most rewarding CD terms: Your terms may not follow a regular maturity schedule, and that’s okay. Better to choose the CD terms that are most rewarding—as long as the maturity dates are still staggered.

4. Split your investment across terms: Each rung of your CD ladder can have varying amounts. If you’re uncomfortable throwing a large amount of money on your lengthiest term, you can put most of your money into the shortest terms until you get the hang of your ladder.

5. Take action during your grace period: When an account matures, decide whether you want to withdraw the money or open a new CD.

Common CD ladder mistakes

Building a CD ladder is pretty straightforward—but there are a few things you should do to ensure you’re always getting the biggest return for your money. Below are some common pitfalls to avoid.

Keeping all funds with the same bank

You’ll almost certainly not find the best APYs for every term you want from a single bank. Don’t be reluctant to spread your money around multiple banks to optimize your return. You may use three or four financial institutions to create your ladder.

Also keep in mind that the FDIC only insures up to $250,000 per account holder per ownership category. If you’ve got more than $250,000 in the bank, it’s wise to keep your money in more than one bank, anyway.

Forgetting to make a move during the grace period

CDs give you only a short period of time after maturity (typically 10 days or less) to withdraw your money or reinvest it into a new CD. If you do nothing, the bank will usually renew your current CD at its current APY—which may be lower than the rate you received upon account opening.

Stay on top of your maturity dates so you can make an informed decision during your CD grace period.

Not checking routinely for rate increases

For better or worse, CD APYs change constantly. Keep an eye on them so you’ll know whether or not to make a move when your next CD matures.

Alternatives to a CD ladder

A CD ladder isn’t the only way to earn solid APY while maintaining liquidity. There are two major alternatives to a CD ladder:

2. High-yield savings (HYSA): While often not as lucrative as a CD, a high-yield savings account operates as a standard savings account which lets you take as little or as much money as you need at any time. Just note that many banks limit the number of withdrawals you can make each month. Also, HYSA interest rates can change at any time.

3. Money market account (MMA): An MMA is essentially a hybrid checking and savings account. Such an account will typically earn a high APY similar to a HYSA, but it also often comes with check-writing privileges and a debit card to make your funds more accessible. MMA interest rates can change at any time.

Both of these options are similarly low-risk, as they are also backed by the FDIC, up to $250,000.

The takeaway

CD ladders can be a great strategy for anyone looking to see steady returns in a low-risk savings option. Just make sure that your plan fits what you’re trying to achieve in your financial situation. If you’re investing in retirement, for example, you may be better off prioritizing tax-advantaged accounts like a 401(k).

For those who simply want to make sure every dollar of their savings is working hard, a CD ladder is tried and true.

Frequently asked questions

How do I build a CD ladder using online banks versus local banks or credit unions?

You can build a CD ladder with online banks just the same as you would with local banks or credit unions. Choose multiple CDs with varying maturity dates and let your money do the work. That said, big banks like Chase and Bank of America tend to have exponentially more CD terms available (though they’re not always competitive).

How do I build a CD ladder if I only have $1,000 to start?

Some financial institutions enforce a minimum deposit, often $500 or more, to open an account. If you only have $1,000 to start a CD ladder, you’ll need to find banks that require no minimum deposit to open an account—such as Capital One—to spread your money over multiple CDs.

How do penalties for early withdrawal impact how to build a CD ladder safely?

Penalties for early withdrawal impact your CD strategy in that the more severe the penalty, the riskier it is to open a long-term CD. A CD ladder helps to minimize this risk by giving you incremental access to your funds so your investment won’t all be tied up at once.

How do I adjust or rebuild a CD ladder if interest rates rise or fall?

If interest rates change, you can adjust your CD ladder accordingly during the short grace period after each CD matures. If you find a CD with a superior return rate, you can withdraw your money and put it into that CD; if not, you may choose to let it renew.

How do specialty products like bump-up or no-penalty CDs change how to build a CD ladder?

A bump-up CD allows you to jump on a higher APY if the bank increases your current CD’s return rate. A no-penalty CD lets you withdraw your money before the account matures without paying a fee. Both of these CDs tend to offer inferior APYs to a standard CD, so they’re usually not ideal in a CD ladder when trying to maximize returns.

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