What to Know About CD Ladders, A Flexible Way to Save

One way to keep your earnings on track is to spread out your cash.

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If you’re looking for a flexible way to save, but still want to take advantage of high interest rates, building a CD ladder could help. Interest rates on CD accounts have been rising, and many accounts have already surpassed 4% to 5%. With a CD ladder, you can lock in these high interest rates and still access your cash at regular intervals.

What is a CD ladder? 

With a CD, you agree to keep your money in an account for a certain period in exchange for a guaranteed interest rate. Terms range from three months to five years or more. The longer the term, the higher the rate. But you may not want to lock your money up for years. One way to stay flexible is with a CD ladder.

A CD ladder is a type of savings strategy where you spread your cash between several CD accounts with staggered maturity dates. This lets you take advantage of higher rates on longer-term CDs, while keeping a portion of your funds accessible at short-term intervals. CD ladders offer a flexible way to save your cash, as you’ll be able to access your money at regular intervals. Plus, opening a CD ladder eases the pressure of having to guess whether rates will go up or down.  

Building a CD ladder

To build a CD ladder, spread your cash among CDs of varying maturities — say, one, two, three, four and five years. Some of your savings will capture the higher rates that long-term CDs offer. When your first CD matures, you can cash out or reinvest the cash in a new 5-year CD to continue building your ladder. Then, when subsequent CDs mature, you’ll continue to reinvest those funds into new CDs to maintain the ladder. Plus, if rates continue to rise, you’ll be able to reinvest the money at a higher yield. 

You’ll earn more if you ladder using CDs at more than one institution, but you’ll have to weigh the extra time you’ll spend setting up multiple accounts. However, you can easily compare current CD rates, by using our tool, powered by Bankrate, below. 

Here’s an example of how a CD ladder would work. Typically, a CD ladder splits your cash into five “rungs,” meaning you’ll open five CDs, one year to five years. Let’s say you have $20,000 to invest. One way you could spread your cash is by splitting it equally.  

When each CD matures, you’ll invest your cash, plus any earned interest, into another 5-year CD. This leaves you with five 5-year CDs, one maturing each year.  

Advantages of a CD ladder

  • Consistent cash flow: Since each CD matures at a regular interval, you have consistent access to your cash. 
  • Interest rates: As each CD matures, you have an opportunity to reinvest your cash and take advantage of any rise in interest rates.  
  • Flexibility: You can save in CDs at different financial institutions, letting you score the best interest rates available. Plus, you can choose whether or not to reinvest your cash once your CDs mature.  

Disadvantages of a CD ladder

  • Active management: Since you'll be opening multiple CDs, potentially at different banks or credit unions, it'll take some work to manage your accounts. If you forget to move funds from one CD to another once it matures, the CD could roll over into the same term that just ended.
  • Inflation: Although rates are high, they are still outpaced by inflation. You could earn more from more aggressive investments, like stocks or bonds. 

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Rivan V. Stinson
Ex-staff writer, Kiplinger's Personal Finance

Rivan joined Kiplinger on Leap Day 2016 as a reporter for Kiplinger's Personal Finance magazine. A Michigan native, she graduated from the University of Michigan in 2014 and from there freelanced as a local copy editor and proofreader, and served as a research assistant to a local Detroit journalist. Her work has been featured in the Ann Arbor Observer and Sage Business Researcher. She is currently assistant editor, personal finance at The Washington Post.

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