A white ladder leads up a blue wall with a puzzle piece shaped cutout of George Washington's face on a monetary bill.

What Is CD Laddering?


Certificates of deposit allow you to gain periodic access to your savings while benefiting from high interest rates.

One of the best ways for savers to take advantage of current high interest rates is with certificates of deposit (CDs) from Fifth Third Bank. But, what are CDs? This type of savings account option offers a number of attractive features, including a guaranteed rate of return and insurance for your money from the Federal Deposit Insurance Corporation. CDs are locked in for the term, and banks are required to charge a penalty for early withdrawal.

The uncertainty over the direction of interest rates poses a challenging set of questions: Do you prefer a short-term CD that matures relatively quickly, which will give you access to your cash if you need it, or would you rather lock in a higher interest rate by extending the maturity of your CD but with a longer lockup period?

How to Ladder CDs

Fortunately, a financial strategy called "CD laddering" can answer these questions and help you find just the right balance between liquidity and healthy returns for your CDs. Laddering involves buying a set of CDs and staggering the maturity dates so you can access some of your funds without incurring the penalty while leaving the remainder to collect high interest.

Assembling a CD ladder is fairly straightforward. Because of fluctuating interest rates, many savers are now using three-month, six-month, and 12-month CDs to create a ladder. To illustrate the process, let’s say you are planning to buy a home and have already saved $5,000.

If you want to be prepared for an emergency without paying a penalty, instead of investing in a single CD that matures in 15 months, you build a ladder by dividing your savings into five equal parts and investing $1,000 each in five different CDs—one that matures in three months, and others that mature in six months, nine months, 12 months, and 15 months. At the end of three months, the three-month CD matures and you reinvest the principal and interest in a 15-month CD and so on (see chart).

Periodic Access to Funds

These are just some of the most common term lengths for CDs; there are lots of other terms to choose from that align with your unique circumstances and preferences. Staggering the maturities of your CDs allows you to access a portion of your funds at regular intervals as each CD matures, without withdrawing all of your money and sacrificing your entire investment because partial withdrawals from CDs are not allowed.

With a CD ladder, you can choose the next step when the CD matures. Laddering is most effective when you instruct your bank to automatically reinvest those funds in CDs that mature in a period that is the same length as your longest-term CD (15 months in the example above). So when your three-month CD matures, the principal and interest you’ve earned are reinvested in a new 15-month CD. Your six-month CD matures three months later and is reinvested in another new 15-month CD, and so on. One CD is maturing every three months, from the moment you create the ladder until the time you "dismantle" it.

The Benefit of Automatic Renewal

In addition to convenience, laddering can capture the advantages of rising interest rates. When your short-term CDs mature, the proceeds can automatically be put back to work at the higher prevailing rate just by choosing the automatic renewal option. If interest rates are falling, the rates you locked in for your longer-term CDs are not affected. You will continue to earn the higher interest rates until the day the CD matures. After that, your funds can be reinvested in another new CD at the lower rate, or you can take the proceeds and save them some other way, such as a Fifth Third Momentum® Savings Account.

If you choose the automatic renewal option and change your mind at the last minute, Fifth Third Bank offers a brief grace period to redeem the CD without a penalty after it matures.

Fifth Third’s CD Ladder Calculator can help you figure out how to best ladder your CD investment. Enter the dollar amounts, term lengths, and interest rates for each rung on the ladder and the calculator will do the math.

Even with a CD ladder, you should be sure you do not need access to the funds before committing because they will be tied up until maturity.

CD laddering can be a smart, low-risk strategy for savers who want periodic access to their funds and more attractive returns than a single, short-term CD offers. Setting up a CD ladder is also relatively simple, carries no fees, and requires only a modest minimum balance. But it does require planning and careful management to ensure your CDs are maturing and the proceeds are being reinvested at intervals that are right for you.

To learn more about CD ladders and how they can help you reach your financial goals, please visit a Fifth Third branch.