How to Build a CD Ladder (And Why You Should Consider It)

There are so many different ways to save and grow your money. One strategy to build a CD ladder. A CD is just one option that’s pretty popular. A CD or Certificate of Deposit is a type of savings product that usually has a higher interest rate than a traditional savings account.

When you deposit your money into a CD, it’s ‘locked’ in that account for a set period of time often referred to as maturity date. If you withdraw the money before the CD has matured, you will likely pay a penalty fee.

CDs are FDIC-insured and often a solid option if you’re looking to grow your money for a few months or years and not get tempted to touch it. ¬†Here’s what it is and why it might work for your financial goals.

What is a CD Ladder?

Normally, when you put all your money into a CD, it becomes inaccessible for several months or years. With a CD ladder, you’d essentially be opening up several CDs and stacking the maturity date. This way, your money is still growing but it’s not tied up long-term.

For example, let’s say you have $5,000 and you open 5 CDs then deposit $1,000 each. Your CD ladder may look something like this:

$1,000 – 12 month CD

$1,000 – 24 month CD

$1,000 – 3-year CD

$1,000 – 4-year CD

$1,000 – 5 year CD

With this type of arrangement, you’d be freeing up some money each year while still earning interest on the older CDs. Also, keep in mind that the longer you store money in a CD, you’ll often lock in a higher interest rate.

While traditional banks may offer a low 0.01% APY on savings accounts, they may offer anywhere from 0.80% on a 12-month CD to 2.50% on a 5-year CD. It really just depends on what rates are like at the time.

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Other Benefits of Building a CD Ladder

With a CD ladder, you don’t have to worry about putting all your eggs into one basket. Instead, you can spread your savings across multiple CDs.

CD rates are fixed so you don’t have to worry about losing money or seeing your rate go up and down. I’m all for investing in the stock market but I’m still open to less risky options grow my money as well. It’s all about balance.

You can also just keep reinvesting money into new CDs each year as the ones in your ladder system mature. I’ll explain more on this in just a bit.

While you likely won't be able to retire based on a CD ladder, it's something to consider! Click To Tweet

How to Start a CD Ladder

If you want to put money into a CD, the best option is to consider breaking up your money and laddering it with these steps.

Determine How Much You Want to Start With

Remember, CDs have a guaranteed rate of return so it all comes down to how much you want to set aside. Some banks have a minimum deposit requirement while others don’t. In general, you can expect a minimum deposit requirement of around $500.

It’s best to start with $1,000 to $3,000 so you can build a ladder with multiple different CDs. Make sure you’re taking a realistic approach and are comfortable with having your money locked away in a CD. Realize that you won’t be able to just transfer those funds over in the event of an emergency. If you do make an early withdrawal from a CD, you’ll likely pay a penalty that could easily cancel out any interest that was earned.

Check Interest Rates

CD interest rates vary so keep an eye out for changes in the market. You may even want to search ‘best CD rates’ on Google and I’m sure there are plenty of sites that have update industry rates and the best offers each month.

Earlier this year, the Federal Reserve lowered interest rates so CD rates are not super great right now. Still, you can definitely earn more than you would by keeping your money in a traditional savings account. Plus, you won’t have easy access to spend it ahead of time.

Determine How Many CDs You Want and When They Should Mature

Now it’s time to consider how you want to ladder everything. Ally actually has a CD ladder calculator that can help you determine how to divvy things up. Or, I’m. sure you can just compare the options for the bank of your choice.

Most people consider putting lower amounts in a short-term CD and saving higher amounts for the longer-term CDs. Here’s an example with a $6,000 deposit.

$500 – 12-month CD

$500 – 24-month CD

$1,0o0 – 3-year CD

$2,000 – 4-year CD

$2,000 – 5-year CD

Consider Reinvesting Once CDs Mature

Keep your CD ladder going by opening another CD once your first CD matures. After it matures, you’ll wind up with more money than you put in thanks to interest growth. Get more compound growth by opening a new CD and starting the process all over again.

If you need the money for anything, you can also consider taking a break when one CD matures and continuing the ladder the following year. It’s really up to you.

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Creating a CD ladder can be an ideal way to diversify your savings and avoid the temptation of spending the money. Rates are fixed and with a laddering approach, you can stagger CD maturity rates so you’ll have access to cash each year if you ever need it.

While you likely won’t be able to retire based on a CD ladder, it’s something to consider trying so you’re not putting all your eggs into one basket.