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

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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. Although interest rates on CD accounts have been softening, many accounts still offer rates above 4%.

With a CD ladder, you can lock in these higher interest rates while they last and still access your cash at regular intervals.

Here's a breakdown of how they work and how much you can earn with this savings approach.

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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 CD 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 the best 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.

$4,000 in a one-year CD
$4,000 in a two-year CD
$4,000 in a three-year CD
$4,000 in a four-year CD
$4,000 in a five-year CD

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.

Are CD ladders a smart approach among rate cuts?

It's very likely the Federal Reserve will cut rates at its September meeting. When the Fed cuts rates, it drops the APY you'll earn with savings accounts, including CDs.

However, you can mitigate this by starting your CD ladder today. One great aspect of CDs is that they feature fixed interest rates, meaning if you lock in your rate today, it's the rate you'll earn throughout your term.

Moreover, CDs offer returns well above 4%. Even if that diminishes some, it will keep you outpacing inflation in the short term. So, the best approach is to lock in rates now while they're still high.

Bottom line on CD ladders

While a CD ladder strategy works for some people, it won’t work for every saver. It all comes down to how you feel most comfortable saving, and how readily you need to access your account deposits.

Factors to consider:

You can’t change or remove rungs once you put your money down. If something happens where you need your money before the CD term is up, you may have to pay penalties for cashing out early. If you need even more flexibility and access than a CD ladder can provide, a high-yield or money market account might be more your speed.
CDs are typically FDIC insured, meaning your cash will be covered up to $250,000 at any given bank. And since you lock in your interest rates, a change in the economy or outlook from the Fed won’t affect your future savings.

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.

With contributions from