Grow Savings With CD Laddering

Time To Read 3 MIN READ

A CD ladder is a certificate of deposit ladder. A certificate of deposit is a type of account you have at the bank where the bank will agree to pay you a certain interest rate for an agreed period of time. Let's say you saw a 2.50% APY 12-month CD, that means the bank will pay you 2.50% APY for twelve months. It also means you don't have access to the money for twelve months. Unlike a savings account, you lose the flexibility of accessing your funds whenever you want and replace it with a guaranteed interest rate. With how quickly rates are falling these days, locking in a good rate is very important. In extraordinary circumstances, you can always close your CD and get your money back if you pay a small penalty, usually 3-6 months worth of interest.


Now that you know what a CD is, what is a CD Ladder? A CD ladder is where you open multiple CDs for different periods of time so that they end in different months. In a 12-month CD ladder, you would open 12 different CDs with 12 different periods – a 12 month CD, an 11 month CD, a 10 month CD, etc. After one month, the 1 month CD will end and you take the funds and put them into a 12 month CD, thus continuing the cycle. It's a ladder because each of the CDs is a rung on your ladder. The end result is that each month you have at least one CD maturing so that you can spend it if you are in an emergency. If you don't have an emergency, you simply reinvest in another CD.

Why would you do this? You get a higher guaranteed interest rate while maintaining access to your money. What's nice about having online banks is that many of them have very low minimums to open a CD. Walk into a regular bank and you might need $1,000 to open a CD. At some online banks, you only need $1! You could open a CD with as little as $12.

What's the catch? Many banks only offer 12 month and 6 month CDs, so in the beginning you'll have to do a little extra work to get the ladder built. In the first month, you'll want to buy a 12 month and a 6 month CD, keeping the rest of your money in the high yield savings account. In the second month, you'll want to buy another 12 month and 6 month CD because your first two CDs will now be an 11 month and a 5 month CD (since a month has passed). In the third month… I think you get the idea. When it's all said and done, you'll have the CDs and only have to buy a new 12 month CD each month.

Avoid buying CDs at different banks because it will become very difficult to manage the different accounts. I would pick the one with the best 12-month CD rate and work backwards from there. In the end, you will only get confused if you have a 12 month at Bank A, a 6 month at Bank B, etc. It is important to learn how to invest your money wisely, and a CD ladder can help you earn interest on money you are not ready to put into the stock market.