AOL
Why you can trust us

We may earn commission from links on this page, but we only recommend products we believe in. Pricing and availability are subject to change.

What is a CD ladder? How to build one for rolling returns — without the long-term commitment

Kelly Suzan Waggoner
Updated
What is a CD ladder? How to build one for rolling returns — without the long-term commitment (Nora Carol Photography via Getty Images)

The Federal Reserve announced a cut to its benchmark interest rates this week, dropping the Fed rate by 25 basis points to a range of 4.50% to 4.75% — the second time its lowered rates since its jumbo half-point cut on Sept. 18 that began pushing rates lower on deposit accounts like savings and CDs.

For savers looking to grow their funds, this means that the landscape of high-yield accounts is rapidly changing. That's why now's the ideal time to lock in your money in CDs to capitalize on guaranteed returns and rates that won't change over the life each CD's term.

But what if you aren't ready to commit a large chunk of cash to one long-term CD? Enter the CD ladder, a smart savings strategy that helps you maximize high returns while maintaining flexibility in a changing rate environment.

To build a CD ladder, you spread your deposit across multiple terms with different maturity dates. This way, you're creating a series of CDs with staggered access to your savings, leveraging short-term gains with long-term stability.

Here’s how a CD savings ladder works, how to build one into your investing strategy — and how to catch the highest rates as they come down.

A CD ladder is a savings strategy designed to take advantage of high CD interest rates without committing all of your funds to one long-term CD. Instead, you distribute your investment across a series of staggered maturity dates, guaranteeing more liquidity through regular access to your money as you grow your overall savings.

Typically, the longer the term of your CD, the higher the annual percentage yield on your deposit. Yet you can find a range of terms offering APYs that earn at least 10 times the FDIC’s national average 0.45% savings rate, making a CD ladder a low-risk way to boost yields on your savings.

Dig deeper: How do certificates of deposit work? 7 types for boosting your savings

The Federal Reserve began lowering its benchmark interest rate in September 2024 — its first cut in four years — and it's committed to measuring out additional rate cuts beyond last week's quarter-point decrease.

Yet even as rates start to come down, here's why a low-risk CD ladder is still worth the investment:

  • Capitalize on short-term rates. Right now, short-term CDs of up to 12 months are offering some of the highest rates available. A CD ladder lets you take advantage of these attractive short-term yields while maintaining the flexibility to reinvest as rates change.

  • Lock in long-term stability. While long-term CD rates may be lower than shorter terms, they still offer the chance to secure today's rates for years to come. This provides a stable foundation for your CD ladder and limits the impact of further Fed rate cuts.

  • Beat inflation. Many CDs, especially at the shorter end of the term range, are still offering rates that outpace current inflation. This helps maintain the purchasing power of your savings over time.

  • Adapt to your changing financial needs. As your financial needs change, your CD ladder can adapt. When short-term CDs mature, you can adjust your strategy based on the current rates available and your financial situation.

Dig deeper: I'm a personal finance expert: Here's why you need to invest in a CD today

Let’s say you have $10,000 to invest in a high-yield CD. You might put the entire lump sum into a long-term CD of 12 months or longer to earn a high rate of return. But if you were worried about liquidity — or needing access to at least a part of that money within the year — a CD ladder could break up your investment and space out your returns.

With a CD ladder, you’d divide your $10,000 investment into smaller amounts portioned across a series of CDs with different maturity dates. Many people divide their money into equal principal amounts, but you can break up the amounts you invest in each CD however you’d like.

Each CD becomes a “rung” on your CD ladder, with the ladder itself offering an overall yield.

Here’s an example of a two-year CD ladder of four rungs offering an average 4.71% yield based on today's rates. (Note that, in practice, actual returns would slightly differ due to compounding over term lengths.)

After each CD in your ladder matures, you have the flexibility of deciding what to do next. In a period of lower interest rates, you can cash out your principal plus interest after each CD matures and move it to another investment vehicle offering higher yields. If rates were to increase, you could reinvest your matured investment into another CD with a higher rate or longer term.

Determine how you'd like to split up the money you want to invest— and then invest those funds in different CDs with staggered maturity terms. Here's how.

  1. Think about how much you can comfortably invest. You’ll have access to your returns at regular intervals as each CD in your ladder matures, but it shouldn’t be a hardship on your budget.

  2. Decide on your number of rungs. Consider the number of CDs you're interested in and how frequently you’d like access to your money. Short terms provide more regular access, while longer terms might offer higher rates.

  3. Shop around for the best rates. Compare the highest yields available for the terms you’re interested in — whether with one financial institution for ease or across multiple banks to maximize your earnings.

  4. Open your CDs and invest your money. Keep track of each CD’s maturity date so you can build in the time to analyze APYs and either roll your balance into a new CD or cash out what you’ve earned

  • Capture and maximize high rates. Your money is locked into guaranteed high rates of return, even if interest rates drop later in the year.

  • Flexible investment cash flow. Staggered maturity dates provide you with rolling access to your money without the early withdrawal penalty of a single long-term CD.

  • Predictable rates of return. CD rates are fixed, which means they won’t change over the life of your term.

  • Your money is insured. CD accounts are insured for up to $250,000 by the Federal Deposit Insurance Corporation — or the National Credit Union Administration, if your CD is with a credit union.

Dig deeper: How much should you keep in a CD?

  • Not a set-it-and-forget-it strategy. It can be easier to maintain your ladder if your accounts are with one financial institution. If not, you’ll need to monitor maturity dates to either roll your investment into another CD or cash out what you’ve earned.

  • Penalty for early withdrawals. If you need to access your money before a CD term expires, you face fees equal to several months of interest, depending on the account.

  • Minimum deposits may be required. While you can find CDs without minimum starting deposits, the highest rates may require $1,000 or more — which may limit how far you can spread your investment.

Dig deeper: When is it worth it to break a CD? An expert talks early withdrawals and breaking even

A CD ladder isn’t the only way to store your money while rates of return are high. Look to these alternatives when considering your investment options.

  • Long-term certificate of deposit. If you’re worried about falling rates and are certain you won’t need to access your investment principal, one high-yield CD could be easier to manage than several.

  • High-yield savings account. A high-yield savings account offers a way to quickly grow your savings investment at rates of 4.5% APY and higher with no penalty for withdrawals.

  • Money market account. The rate on a money market savings account can beat those of traditional savings accounts, with the same access to your money.

  • Higher-risk investments. Stocks, index funds and mutual funds average higher returns than CDs, though with higher potential losses.

Dig deeper: High-yield accounts vs. CDs: Which is best for maximizing your money as rates cool?

A CD is a type of savings or deposit account offered by banks, credit unions and other financial institutions. Unlike a traditional savings account, a certificate of deposit holds your money for a set period of time — terms of one month to five years or longer — paying out your principal and any interest you've earned only after the term expires or "matures."

Typical CD rates are fixed, which means the rate of return doesn't change over the life of your term. And while you can't add to or access your money until the CD matures, the trade-off is a higher yield than you'd find with a traditional savings account, making a CD a safe, stable way to grow your savings.

Learn more about building a CD ladder and how to incorporate one into your savings strategy.

Yes, you can build a CD ladder with certificates of deposit bought through a brokerage firm or investment account. Called brokered CDs, you choose a term length that comes with a set interest rate, like a traditional CD, but you can buy them either new or “used” from other investors on the secondary market as well. Most platforms allow you to ladder your primary CDs. Learn more about how brokered CDs work and whether they're right for you.

Banks charge higher interest rates on money they lend out than the interest they pay on customer deposit accounts. The difference is called a spread, and it’s what banks rely on to make money. Unlike a traditional savings account that allows for flexible movement of your money without penalty, a CD requires you to lock in your deposit over a specified period of time, returning your principal plus interest after the account matures. That lock-in period — and penalties that discourage your early withdrawal — allows a bank to better plan how long it has to make money off your deposit, and it’s typically willing to pay a little more for that reliability.

Compound interest is often described as earning interest on your interest. It’s a powerful way to boost your savings over time by earning interest on both your initial deposit and any interest you earn along the way. It means that every dollar you save is working harder and growing faster toward your financial goals.

An account's APY is the total amount of interest you'll earn on your deposit over one year, including compound interest, expressed as a percentage.

A jumbo CD is a certificate of deposit that requires a minimum of $100,000 to open the account. Like regular CDs, jumbo CDs come with a fixed interest rate and term. In the past, jumbo CDs offered a way for people and businesses to safely invest money at higher rates than available with a traditional CD.

However, with the Fed holding interest rates at 23-year highs, it’s not always true that jumbo CDs have a higher interest rate than traditional CDs. Learn more about jumbo CDs and why it's wise to shop around before locking your money into one.

Yes. Online-only banks and digital accounts are as safe as their traditional counterparts. They are either FDIC-insured chartered banks or partner with more recognizable banks to offer deposit accounts that are protected by the government for up to $250,000. The FDIC insures the safety of your money, even if the fintech were to fail or go out of business. Look for terms like "member FDIC," "FDIC insured" or "NCUA insured" when comparing your options. Learn more about how online banks compare to traditional banks when it comes to rates, fees and management of your money.

A no-penalty CD — also called a liquid CD — is like a traditional CD through which you lock in a deposit for a guaranteed rate of return over a stated period of time, but with the flexibility of withdrawing your money without penalty before the CD matures. This flexibility comes with trade-offs, however, including lower rates of return than a traditional CD. With rates at historic highs, a high-yield savings account may offer comparable or even higher rates than a no-penalty CD with the same flexibility. Learn more about what to watch for with no-penalty CDs.

Kelly Suzan Waggoner is personal finance editor at AOL. Before joining AOL, Kelly was managing editor at Bankrate and editor-in-chief at Finder, where she led a team focused on helping people to make unfamiliar financial decisions around banking, lending, credit cards, investments and more. Kelly’s expertise has been featured in Nasdaq, Lifehacker and other publications. Today, she's dedicated to empowering those planning for, newly entering or fully enjoying retirement to get the most out of their finances — whether that's saving money, managing debt, maximizing rewards or growing their wealth.

Article edited by Yahia Barakah

Advertisement