Make your cash work harder in a certificate of deposit–but not just one–ladder your deposits to help diversify your cash investments, reach your savings goals, and get a more secure bang for your buck.
What Is a CD Ladder?
A CD ladder is built by depositing a sum of money, equally, across multiple certificates of deposit with a series of maturity dates. The length of the CD determines the amount of guaranteed interest–typically, the longer the maturity of the CD, the higher the rate.
The ladder can provide value with the passing of time. (If you’re wondering how much value, check out Ally Bank’s handy CD Ladder calculator!) As the first CD expires, assuming the cash isn’t needed, the balance (which has grown with interest) can be rolled into the longest term CD with the highest interest rate. Since one term has passed and all remaining open CDs have moved up by a term, you’re back to where you were on day one, except a portion of your money is earning even more interest than it was before.
This maturing and rolling over continues until, eventually, all CDs in the ladder are in the longest maturity–highest rate CDs, yet expiring in equal, consecutive terms.
The concept of a CD Ladder strategy can be a bit difficult to understand without visualization, so here’s a video to help you see how one is built:
For a walk through of how you’d build your Emergency Savings CD Ladder, check out the video on my channel, Wander Wealthy by Tess Wicks.
Benefits of a CD Ladder:
- Competitive Rates: Your CD ladder money can be deposited in higher interest accounts that can produce, on average, a higher return than a money market or online savings account over the same period of time.
- Liquidity and Accountability: Access cash at frequent intervals with a ladder compared to one single CD, yet infrequently enough to allow your money to grow.
- Provides a Barrier to Withdrawal: Do you find yourself drawing money out of your savings account a little too often? A CD ladder makes it feel a bit more difficult to access your saved funds, and gives that money a time-bound goal.
- Diversification and Low-Risk: Adds diversity to your assets and provides a great option for shy or low-risk savers. Laddering your CDs also provides rate diversity and ability to capture higher rates as short-term CDs expire.
- Peace of Mind: Capture interest increases over time with a ladder of CDs, and maintain higher interest if rates fall with older CDs.
Considerations for a CD Ladder:
- Penalties: Need your cash now? Depending on the CD, you might be penalized if you tap into your CDs that haven’t matured yet. Keep in mind that Ally Bank offers a few “No Penalty CD” options.
- The Long-Game: CD ladders are a long-term game. Well, as long as your longest CD. If you don’t think you can stick it out to capture those higher interest rates, it may be better to stash your cash in a high-yield online savings account.
- Rate Changes: Although having predictable rates provides you peace of mind, you can also get a bit of F.O.M.O. if you build your ladder and then rates rise shortly after.
How to Use and Build a CD Ladder
CD ladders are great for risk adverse savers who want to get a slightly higher return on their money without the downside risk. Using this strategy can give you frequent access to your cash in case you need it, while keeping it just beyond an arm’s length so that cash isn’t called upon for random spending and splurges.
It’s mentioned above that a CD ladder is great for saving towards time-bound goals, but what type of goals might this be? Here are some examples:
Whether it’s travel or the winter holidays, narrow down a goal that repeatedly happens once a year. Use multiple savings accounts to save for those goals, but once you’ve reached and exceeded your savings goal–or you’d rather start building with small CDs now–build a CD ladder that has these funds expiring once per year with an increased rate of return.
For instance, let’s say you have enough money saved that could send you on three vacations plus one for this year, but you can only reasonably take one per year. Before “vacation time” put your cash in a 12-month, 2-year, and 3-year CD, having them expire when you will most likely use the money. Continue to save into your travel savings account throughout the year. Come next year when it’s time to take your trip, withdraw from your 12-month CD to use for your trip, while the cash you saved goes into another 3 year CD, now that the 2-year and 3-year have shortened by a year.
Don’t yet have enough money saved that could essentially equal four vacations? Build it with shorter-term CDs to lock your disposable cash into a purposeful time-bound goal and roll over funds upon maturity until you’re at that 3-year Travel Fund ladder.
Emergency Savings Fund
Once you’ve managed to build an emergency savings fund to meet your savings goal, you may find yourself conflicted between security and opportunity cost. Keeping your money in a savings account allows you to access it at any time, but doesn’t allow the hefty balance to earn much of a return.
The solution? Build yourself an emergency fund savings CD ladder. Depending on how many months of emergency money you have saved up, you will need to open CDs that correlate with your goals. As an example, we’ll look at someone who has an entire year of living expenses accounted for in their emergency savings fund.
Utilizing high-yield CDs, like the ones provided by Ally Bank, this person would take four months of expenses from their emergency savings fund and open a 3-month, 6-month, 9-month, and 12-month CD in one month, depositing the same amount of cash across all four CDs.
The next month, they would add to this collection of CDs by opening up another group of 3-, 6-, 9-, and 12-month CDs. The CDs from the previous month will have advanced by one month so now, out of the entire year, eight months are accounted for in CD form, earning a higher rate of return, while the remaining four months of expenses are still in the savings account.
The third and final month for building will be to take the remaining four months of emergency expenses out of the savings account and deposit them into the same grouping of CDs as above. By the next month, our first 3-month CD will mature with a small return. If the person needs the money for an emergency, they will use it; otherwise, they can deposit the initial deposit plus the interest earned (or pocket the return for their own indulgences) into a high-yield 12-month CD. As the months pass, the person will continue to repeat this exercise for a year until all CDs are at the 12-month rate.
This allows for an emergency fund that is secure, available to you on a monthly basis, yet earning more interest than it otherwise would be from sitting in savings.
Building a CD ladder to capture higher returns and get after your goals can be a slow and strategic game, but it’s one you might find worth playing. Don’t miss out on putting your money to work for you. Take advantage of all the money-making opportunities you have, and discover what it’s like to get that much closer to being financially independent.
Want to learn more about money optimization, personal development, and affordable travel? Check out my Wander Wealthy YouTube Channel, and come join the party!
Tess Wicks is the founder of and voice behind Wander Wealthy, a podcast and YouTube channel for millennial women who want to make smart and savvy financial decisions. She is a wealth and mindset coach, who provides tools and education for online coaches and service-based entrepreneurs.