How to build savings with a CD ladder

Certificates of deposit (CDs) are a great way to park your savings and earn better interest than you would with a savings account. The longer the term on your CD, generally the better the interest rate – a 60-month CD will likely pay better interest than a 6-month CD. The drawback is that you can’t withdraw your principal (the amount you initially invested) prior to maturity without paying a fee.

That’s where the CD ladder comes in. A CD ladder leverages the best features of a CD (interest rate and safety) while mitigating the restrictions on withdrawing the funds.

You build a CD ladder by investing money into multiple certificates that mature at staggered intervals. Let’s say you have $5,000 to work with. One simple way to build a ladder is to deposit your money into five CDs with terms of varying length. As each CD reaches maturity, you can redeposit them into a new CD.

  • $1,000 in a 12-month CD

  • $1,000 in a 24-month CD

  • $1,000 in a 36-month CD

  • $1,000 in a 48-month CD

  • $1,000 in a 60-month CD

At the end of the first year, when your 12-month CD matures, you reinvest that money into a new five-year CD. When the second CD matures the next year, you do the same, and so on until you have five, 60-month CDs with one maturing every year. If you don’t need the money, you can keep reinvesting into your CD ladder as the certificates mature.

If waiting a year for your CD to mature feels too long, you could create a short-term ladder by making these adjustments:

  • $1,000 in a 6-month CD

  • $1,000 in a 12-month CD

  • $1,000 in an 18-month CD

  • $1,000 in a 24-month CD

  • $1,000 in a 30-month CD

When your 6-month CD matures, you reinvest that money into a new 30-month CD. When the second CD matures at 12 months, you do the same, and so on until you have five, 30-month CDs with one maturing every six months.

CDs are attractive because of their security and guaranteed returns, and saving your money in a CD or a series of CDs can be a savvy financial move. It’s one way to make your money do more for you.

 

Back to financial education resources

Go to main navigation