Certificates of deposit (CDs) are one of the safest ways to earn interest on your savings. But they come with a catch: your money is locked away for a fixed period. If you withdraw early, you’ll likely pay a penalty.
That’s where a CD ladder comes in. This simple strategy lets you earn higher interest rates while still getting regular access to your money. It’s especially useful if you want predictable cash flow without taking on investment risk.
Let’s break it down step by step.
What Is a CD Ladder?
A CD ladder is a savings strategy where you split your money across multiple CDs with different maturity dates instead of putting everything into one CD.
When each CD matures, you can either:
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Withdraw the money if you need it, or
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Reinvest it into a new CD to continue earning interest
This creates a cycle where some of your money becomes available regularly while the rest continues earning higher rates.
Think of it like building a ladder each CD represents a “rung,” and each rung matures at a different time.
Why CD Laddering Is Useful
CD ladders solve one of the biggest downsides of CDs: lack of flexibility.
Here’s what makes them attractive:
1. Regular Access to Cash
Instead of locking all your money for years, part of your savings becomes available at scheduled intervals.
For example, if you have CDs maturing every year, you’ll have access to some cash annually without paying penalties.
This can help cover:
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Annual expenses
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Tuition payments
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Home repairs
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Retirement income
2. Higher Interest Earnings Over Time
Longer-term CDs usually offer higher interest rates. A ladder allows you to take advantage of those higher rates while still maintaining access to part of your money.
Without a ladder, you might keep everything in a short-term CD and miss out on better rates.
3. Protection Against Interest Rate Changes
Interest rates constantly rise and fall. If you lock all your money into one CD, you’re stuck with that rate until it matures.
With a ladder, you regularly reinvest maturing CDs at current rates. This helps you gradually benefit if interest rates increase.
A Simple CD Ladder Example
Let’s say you have $10,000 to invest.
Instead of putting it all into one 4-year CD, you divide it like this:
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$2,500 in a 1-year CD
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$2,500 in a 2-year CD
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$2,500 in a 3-year CD
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$2,500 in a 4-year CD
Here’s what happens next:
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After 1 year, the first CD matures
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You can use the money or reinvest it into a new 4-year CD
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The following year, another CD matures
Eventually, you’ll have a system where one CD matures every year.
This gives you:
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Steady access to cash
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Ongoing interest income
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Continuous reinvestment at current rates
Real-Life Example: Using a CD Ladder for Retirement
Imagine someone retires with $100,000 in savings and builds a CD ladder.
They divide the money into five CDs with maturities from 1 to 5 years.
Each year:
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One CD matures
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They use that money for living expenses
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The rest of their savings keeps earning interest
This creates a reliable income stream without needing to sell risky investments like stocks during market downturns.
How Long Should a CD Ladder Be?
Most people build ladders lasting between 3 and 5 years.
Here’s why:
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Longer CDs usually pay higher interest
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But shorter CDs give more flexibility
A 5-year ladder is a popular choice because it balances both.
If you might need the money sooner, consider a shorter ladder.
How Often Should CDs Mature?
The most common approach is using 1-year intervals because it’s easy to manage.
For example:
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One CD matures each year
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You reinvest or withdraw
Some people use 6-month intervals for more frequent access, but this requires more tracking and management.
Keep it simple if you’re just starting.
CD Ladders and Cash Flow
One of the biggest advantages of laddering is predictable cash flow.
You don’t have to wait years to access your money. Instead, you receive funds at regular intervals.
This is especially helpful for:
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Retirees who need steady income
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People saving for future expenses
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Anyone who wants flexibility without losing interest earnings
How CD Ladders Help When Interest Rates Change
Interest rates are unpredictable.
Here’s how laddering helps in different scenarios:
If rates rise:
You can reinvest maturing CDs at higher rates.
If rates fall:
Your existing longer-term CDs continue earning higher locked-in rates.
This balances risk and reward automatically.
CD Ladders as Part of a Safe Investment Strategy
CD ladders are considered very low risk. They’re ideal for the safe portion of your financial plan.
They can provide:
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Stable returns
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Reliable income
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Protection of your savings
Many investors combine CD ladders with other investments like stocks or mutual funds to balance safety and growth.
When CD Ladders Might Not Be the Best Choice
CD ladders require commitment. They may not work well if you need quick access to your money unexpectedly.
Early withdrawals often trigger penalties that can erase your interest earnings.
If you need maximum flexibility, consider keeping some money in:
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Savings accounts
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Money market accounts
These accounts offer lower interest but easier access.
Alternative CD Strategies
While laddering is popular, there are other CD approaches:
Bullet Strategy
You buy multiple CDs that all mature at the same time.
This works well if you know exactly when you’ll need the money such as saving for a home down payment.
Barbell Strategy
You split your money between:
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Short-term CDs
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Long-term CDs
You skip the middle terms.
This gives both flexibility and higher earning potential.
Important Tip: Watch Your Maturity Dates
Many banks automatically renew CDs when they mature.
If you’re building a ladder, you’ll need to track maturity dates carefully so you can:
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Withdraw the money, or
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Reinvest according to your strategy
Otherwise, your ladder could get disrupted.
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