How to Create a CD Ladder

A man and woman discuss CD ladders as a potential opportunity to increase their savings.

If you're looking for a way to earn more from your savings while still using a low-risk savings vehicle, then laddering Certificates of Deposit (CDs) may be a smart move. CDs offer savers an alternative to a traditional savings account, but much of the same safety. They provide higher interest rates, and they're backed by the Federal Deposit Insurance Corp (FDIC).

The primary drawback, however, is that to obtain those interest rates, you need to invest your money for a set amount of time. That can range from six months to two, three, or even five years, depending on the CD. The limited liquidity may give some investors pause—what if you need your cash sooner?

This where a CD ladder may make sense. The strategy allows you to benefit from the higher yields offered by CDs, without tying up your savings for years.

What is a CD Ladder?

With a CD ladder, you invest in multiple CDs at one time. Each has a different term, and thus, a different interest rate, with the longer-term CDs offering higher rates. The CDs mature as they reach their terms, freeing up your cash in intervals instead of all at once. The strategy gives you access to the higher rates, which helps you earn more money on your savings overall while ensuring that you still have access to some of your cash.

In the traditional approach, you might divide your savings between 1-year, 2-year, and 3-year CDs. If you had $6,000, you could put $2,000 into each CD. When the first rung of your ladder matures—the 1-year CD—you would then reinvest your savings plus the return you earned at the top of the ladder, the 3-year CD. You repeat this process as often as makes sense for your investment and savings goals.

While conventional wisdom has suggested that investors to split their money evenly between each "ladder rung," you can invest varied amounts. To determine how much to invest in each rung, consider the amount you'll need in the short term, how much you have to invest overall, and the period of time you have to invest (is this a three-year-endeavor, five, longer?). Then invest in each ladder in the way that meets your personal needs.

The Pros and Cons of a CD Ladder

As noted, the primary advantage of the ladder strategy is to maintain liquidity and flexibility with your savings, while also benefiting from a higher yield. Also, by laddering your investments, you can take advantage of those higher-interest, longer-term CDS—something you might not be able to do if you were saving your funds in just one CD.

The downside, however, is that you could earn a higher return with other types of investments. For instance, while CD interest rates are usually in the 1% to 3% range, the stock market can return far more. But to get those potential returns, you have to take on much more risk.

A ladder strategy may also come with some interest rate risk. Usually, CDs with longer terms have higher rates. If rates suddenly rise, then you could be locked into longer-term CDs with rates that are less than your short-term ones. Finally, also consider if you may need access to your money sooner. With CDs—ladder or not—if you do need your money before the term is up, you'll pay a penalty.

A CD Ladder in Action

The end goal is to put your savings to work in a way that earns you more than a traditional savings account. Here's what that could look like:

Using our previous example, say you invested $6,000 into a three-year ladder—$2,000 each into a 1-year, 2-year, and 3-year CD with interest rates of 1.5%, 2%, and 2.5%, respectively. Then you reinvested your money as each rung matured. After five years, you would have $6,754, which is $286 more than investing in the shortest term CD and continuously rolling your funds over.

You can use Fifth Third's CD Ladder Calculator to explore how a ladder can work with your savings.

Is a CD Ladder Right For You?

CD ladders offer a host of benefits, along with the security of knowing you won't lose your money. To determine whether one makes sense for you consider:

  • How much cash you need access to now for emergencies or anticipated expenses.
  • Your investment time frame and liquidity needs in the future.
  • Your commitment to maintaining the ladder over the time frame.
  • Your savings alternatives and the interest rates they provide.

You can save and earn at the same time. Put some thought into whether a CD ladder works for you—and reap the rewards of a secure investment strategy that still preserves your access to cash.

The views expressed by the author are not necessarily those of Fifth Third Bank, National Association, and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank, Member FDIC.