How to Build a CD Ladder—and Why

CD Laddering can help you fight the temptation to spend

A CD Ladder can be an effective strategy to grow your savings. It’s an approach that can help you head off the temptation to spend, while allowing you to put more of your money aside for the future.

To understand how CD laddering works, let’s look at Jen. She wants to invest in CDs that earn the highest possible rates, but this generally means selecting CDs with longer terms. Jen is uneasy at the thought of locking up all her cash for an extended period of time. Her laddering strategy is to invest equal amounts of money in short-, medium-, and long-term certificates of deposit that mature at staggered intervals—like the steps of a ladder. When Jen’s short-term CD matures, she reinvests the funds in a longer-term CD. (Or, if she needs the cash, she can generally withdraw the funds without penalty at maturity.) Eventually Jen’s ladder will consist of only long-term, higher-yield CDs. Laddering allows Jen to gradually commit her cash to longer-term, typically higher-yield Certificates of Deposit.

CD Laddering: an example

Say you receive a $2,500 tax refund or bonus from work and you want to fund a CD ladder. You might build one that matures in one-year increments by investing:

  • $500 in a 12-month CD with 1.20% APY*
  • $500 in a 24-month CD with 1.30% APY*
  • $500 in a three-year CD with 1.45% APY*
  • $500 in a four-year CD with 1.55% APY*
  • $500 in a five-year CD with 1.85% APY*

When the 12-month CD matures, open a new five-year CD. When the 24-month CD matures, open another five-year CD, and so on. In five-years, you’d have only the higher-yielding five year CDs in your ladder—and every year one of them would mature. 

Can you spare a little time?

CDs with longer terms may help you earn more over time. One thing to remember about buying CDs that mature in a year or more is that you lock up your money for that period. You could access the funds if you needed to, but in most cases (depending on the terms and conditions applicable to the CD), you may be required to pay an early withdrawal penalty, which would reduce your principal.

If you’d like more frequent access to your money, consider building a ladder with CDs that mature more quickly—for example, you could ladder six-month or three-month CDs. A three-month CD ladder can be more time-consuming to manage as you’d be reinvesting distributions more often, but you could also have access to your funds (without an early withdrawal penalty) more frequently.

Be prepared for an emergency

Experts generally agree that you should have three to six months of living expenses set aside in case you lose your job—more if you have children or are the sole breadwinner in the family. Rather than stashing all that emergency money in an easy-to-access savings account, consider using some of it to build a short-term ladder and stagger the CDs so they mature every quarter. Reinvest the proceeds to perpetuate the ladder—or use the rainy-day cash, if a rainy day comes. Keep in mind that using a CD ladder to hold your emergency fund doesn’t have to tie up all your cash. It’s a good idea to always keep a portion of your emergency fund in a simple savings account—such as a high-interest savings account. This way, your money won’t be completely tied up if a leaky roof or car problems require immediate financial attention.

A CD ladder might not necessarily bring you higher returns than investments such as stocks, but CDs come with far less risk. Consider taking advantage of that security, and the ability to lock in rates, and use CDs as one of several savings tools to help bring balance to your financial life. 

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*Annual Percentage Yield (APY): stated APYs are for illustrative purposes only and do not necessarily reflect APYs that are currently available.

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.