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How to Build a CD Ladder - and Why

July 14, 2021

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What is a CD ladder?

Here’s the no frills answer: A CD ladder is a savings strategy where you spread a lump sum of money across multiple CDs (certificates of deposit) with different maturity dates.

What does that really mean? Well, it’s a more tactical way to save money.

The goal of CD laddering is to lock in high APYs (Annual Percentage Yields) across multiple CDs, instead of lumping all of your funds into one CD. Those multiple certificates of deposit will mature (in other words, the CD term has ended) at different points in time. As each CD matures, your cash will free up to either use or rollover into new CDs.

If this is feeling a little complicated, don't worry. Read on. Just think of it as learning the rules to a new game. We’ll explain how it works, outline some examples and show you how to build a CD ladder that works for you.

But first, what's a CD?

Let's start with a quick refresher. A Certificate of Deposit (CD) is a type of savings product that typically has higher interest rates than a traditional savings account, and a fixed maturity date. Most CDs are FDIC-insured, so you can rest easy knowing your money is protected. The catch is that your funds are locked for a set amount of time, meaning you typically can’t withdraw your balance before the CD matures without paying a penalty.

Side note: No-Penalty CDs typically allow you to withdraw your balance to your bank account beginning seven days after funding, with no penalty. However, for the purposes of this article, we’ll be looking at traditional CDs, where you’re locked into a rate for a fixed amount of time.

By spreading your pot of money across multiple CDs, a CD ladder offers you flexibility.

The benefits of a CD ladder

When you put all of your money into a single CD, your money is tied up until your CD matures (unless you’re willing to potentially pay an early withdrawal penalty). We hate to use the cliché of having all of your eggs in one basket, but…that’s really what you’re doing.

That's where CD laddering can come in handy.

By spreading your pot of money across multiple CDs, a CD ladder offers you flexibility. Part of your money becomes accessible each time one of your CDs mature.

It’s also worth noting that while fixed-rate CDs provided a guaranteed rate of return, CD rates available in the market may fluctuate depending on a number of factors. Since you can’t really predict whether CD rates will go up or down, laddering your CD lets you hedge against the unknown of how rates will shift.

Another perk of CD ladders? You’re able to take advantage of rates on longer-term CDs, which are typically higher, without committing all of your money to that CD.

CD ladder calculation example

Before we get into the details of how CD ladders work, let’s start with an example. Say you use $25,000 to build a CD ladder that matures in one-year increments:

$5,000 in a 12-month CD with 2.50% APY*
$5,000 in a 24-month CD with 2.55% APY*
$5,000 in a three-year CD with 2.60% APY*
$5,000 in a four-year CD with 2.65% APY*
$5,000 in a five-year CD with 2.80% 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.

The idea is that the first part of your ladder is built with baby steps (shorter-term CDs) so that you have access to some amount of cash each year. As time passes, your ladder will evolve so that it’s primarily constructed of longer-term CDs (earning you higher APYs), but you still have access to cash each year.

The idea is the first part of your ladder is built with baby steps so that you have access to some amount of cash each year.

How does a CD ladder work?

Let’s assume you want to put your money in CDs that earn the highest possible interest rates. Typically, this means selecting CDs with longer terms. You might be uneasy at the thought of locking up all of your cash for an extended period of time. So what do you do?

In this case, you could place smaller amounts of money in short-, medium-, and long-term CDs that mature at staggered intervals—like the steps of a ladder. When your short-term CD matures, you can take that money (and the interest you’ve earned on it) and put it in a long-term CD. Alternatively, if you need the cash when the CD matures, you can withdraw the funds.

Eventually your ladder would consist of only long-term, higher-yield CDs. This laddering approach allows you to gradually commit cash to longer-term, typically higher-yield CDs.

How to build a CD ladder

Start by deciding how much you want to save in CDs. Be realistic about what you’re comfortable putting away since your money is going to be tied up. You’ll eventually have access to that money again (and it will have grown!), but whatever amount you’re using to build your CD ladder shouldn’t be a financial strain.
Determine how frequently you want your CDs maturing and how many CDs you want to open. A ladder may consist of five CDs (the example we used above), each maturing annually, but perhaps you want your CDs maturing at more frequent intervals. That may require more CDs. You can design your CD ladder however you want – the key is deciding on the total amount you’re putting in and how frequently you want CDs to mature.
Build your CD ladder. Once you’ve determined how much you want to save and how many CDs you want to open, open your CDs, staggering the CD terms so that your money will mature at different dates on a rolling basis (every year, every six months…whatever you choose).
Continue laddering. Once your first CD matures (in the example above it would be after 12 months), use the money from that CD to fund a longer-term CD, putting it at the top of your CD ladder. Alternatively, if you need the cash, you can withdraw it to your bank account at this time. Each time one CD matures, you’ll have the option to renew it or pull your money.
Save, rinse and repeat.

What is the best CD ladder strategy?

There is no “best” strategy – it’s about picking the strategy that’s appropriate for you based on how frequently you’ll want access to the cash and what you’re trying to save money for. Here are some general tips:

If you don’t think you’ll need cash in the near future, the traditional strategy outlined above is simple, and probably ideal.
If you think you may need cash in the near future, or on a regular basis, laddering with shorter-term CDs could be a good option.
If you don’t know when you’ll need cash and want a blend, you can try what’s called the barbell CD strategy. This means you’ll spread your money across a mix of both short-term and long-term CDs. Half of your total savings might go toward your short term bucket (potentially 6, 9 and 12 month CDs) and the other half might go toward your long-term bucket (3, 5 and 6 year CDs).

One thing to remember about opening CDs that mature in a year or more is that you lock up your money for that period.

Access to cash

CDs with longer terms may help you earn more over time. One thing to remember about opening 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 CDs. A six-month CD ladder can be more time-consuming to manage, but you could also have access to your funds (without an early withdrawal penalty) more frequently.

Be prepared for an emergency

It’s generally a good idea to have three to six months of living expenses set aside as your emergency fund. You could set up a CD ladder to do this, but again, be aware that access to your money is fairly restricted.

If that makes you uneasy, consider a high-yield savings account or even a No-Penalty CD. You could also set aside some portion of your emergency fund in one of these accounts, and then build a CD ladder with another portion. This way, your money won’t be completely tied up if a leaky roof or car problems require immediate financial attention.

Remember that a CD ladder is a savings strategy, and might not necessarily bring you the same returns as investing. But CDs come with far less risk, and that can give you some peace of mind. 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.

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

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This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.