Skip to main content
Log In

What is CD Laddering and How Does it Work?

CD laddering is a saving strategy that takes advantage of the strengths of certificates of deposit (CDs) to maximize returns. A CD is a type of savings account in which you deposit money for a specific period of time. Most CDs earn a fixed interest rate, but variable-rate CDs are available.

CDs may offer higher interest rates than traditional savings accounts or money market accounts. However, your funds are locked in until the CD matures, making it a stable option but not very accessible. This is where CD laddering might help you balance access to funds and growth.

What is CD laddering?

CD laddering is a strategy that involves dividing your savings across multiple (CDs) with different maturity dates. Instead of putting all your money into one CD, whether it's long term or short term, CD laddering spreads your money over multiple CDs with varying terms, providing more control over when you have access to your money.

This means that a portion of your money becomes available periodically as each CD matures, while the rest remains in the other CDs on the ladder. This strategy can be a way to balance the benefits of both short-term accessibility and long-term growth. It can allow you to take advantage of higher annual percentage yields (APYs) and place your money where you find good value.

How to set up a CD ladder?

To build a CD ladder, start by dividing your funds equally among CDs with different maturities. The goal is to have one CD maturing every few months or annually, giving you the option to renew or access cash as needed.

There are different strategies for building CD ladders. Here's an example of how to set up a CD ladder with $20,000:

  • 1-year CD: $4,000
  • 2-year CD: $4,000
  • 3-year CD: $4,000
  • 4-year CD: $4,000
  • 5-year CD: $4,000

When the 1-year CD matures, you can roll the money and interest into a new 5-year CD, which might have a higher interest rate than the 1-year CD did. Every year, another CD will mature, and you can roll that into a new 5-year CD. You can keep this ladder going for as long as it suits your needs.

You also can set up a ladder using short-term CDs. The CDs in this ladder would mature more quickly, giving you more access to funds.

How does CD laddering work?

One of your first decisions will be how much you can afford to put into your CDs. You'll also need to decide whether to use short-term CDs or longer-term CDs, as in the example above. Once you open the CDs, you wait and prepare for the first maturity date.

When the first CD matures, you can roll the money over into a new CD to build and extend the ladder. You have other options, too. You can withdraw all or part of your funds. You might move only part of the money from the mature CD into a new one on the ladder or put even more into that next CD. As the maturity date approaches, you'll have time to reassess your goals and needs. Changes in interest rates and financial markets also can come into play.

As each CD matures, you can adjust your ladder to fit your new circumstances.

Benefits of a CD ladder

A CD ladder may offer several advantages.

  1. Stable rates of return. Using CDs with a fixed APY, your earnings are predictable and not subject to the kind of volatility you might see with other accounts. This can make them a great tool to help you reach your goals

  2. Regular access to funds. A portion of your money will be accessible at each CD maturity date. Unlike locking your entire savings into one long-term CD, a ladder provides more frequent liquidity

  1. Maximizing compound interest. By putting funds from matured CDs into new accounts, your money grows over time

  2. Protection from interest rate fluctuations. If interest rates rise, you can lock in better CD rates when you renew the ladder. If rates fall, the CDs already in place allow you to benefit from previously higher APYs

Considerations when using a CD ladder

While CD laddering may offer many advantages, it’s essential to keep a few things in mind for optimal money management:

  1. Monitor your CDs regularly. As each CD matures, you’ll need to decide whether to put the funds into new CDs or use the funds some other way. This requires active management, especially if you want to maximize your rates of return

  2. Deposit what you can afford to lock away. Early withdrawals from a CD often result in penalties, which will reduce your earnings. It’s important to only use funds you won’t need for the duration of the term

  1. Balance savings and liquidity needs. A ladder can make your CDs more accessible, but they still are not suitable as an emergency fund. Budgeting will help you determine what to keep in a more accessible savings account

  2. Understand your goals. When you are making decisions about a CD ladder, think in terms of an overall plan. Objectives like savings and debt management can come into play as each CD on the ladder matures

CDs from TD Bank

This article is for general informational purposes only. It is not intended to provide specific financial, investment, tax, legal, accounting, or other advice and should not be acted or relied upon without the advice of a professional advisor. A professional advisor will recommend action based on your personal circumstances and the most recent information available.

1Partial and full withdrawals may be made without penalty during a ten (10) day grace period that begins on the maturity date.

Have a question? Find answers here

Popular Questions