How to Build a CD Ladder

Written by Nickel - 8 Comments

With the recent talk about CD rates being on the rise, I thought I’d write a few words about building a CD ladder. When you buy a CD, you are essentially loaning your money to the bank for a fixed period of time in return for a (typically) fixed rate of return. In general, longer terms are rewarded with higher returns. But you don’t always want to tie up your money for the long term, do you?

The logical solution is to stagger your CDs such that you can commit to a longer term, yet retain some degree of liquidity. In practical terms, this means buying (say) five CDs of equal value, ranging from one year to five years in duration. After a year, the one-year CD (occupying the first ‘rung’ on the ladder) matures, the two year moves from the second rung to the first, and so on. At that point, simply roll the money from the now defunct one year CD into a new five year CD. If you repeat this process for four consecutive years, you’ll be the proud new owner of a five year CD ladder (see below).

Not only does the increased liquidity of a CD ladder reduce the likelihood that you’ll have to break a CD and pay a premature withdrawal penalty in the event that you need a bit of extra cash, but the fact that you’re reinvesting a portion of your money every year helps to smooth out the peaks and valleys of interest rate fluctuations. Just keep in mind that you can create a ladder of whatever length you wish and, in a low-rate environment, you may want to keep a new ladder relatively short. After all, you don’t want to be stuck with a slew of low-rate CDs when rates start to rise.

Oh, and in case you’re curious, here’s some info on how to track your CDs in Quicken.

Start of Ladder:
Rung 1: 1 year CD, 1 year remaining
Rung 2: 2 year CD, 2 years remaining
Rung 3: 3 year CD, 3 years remaining
Rung 4: 4 year CD, 4 years remaining
Rung 5: 5 year CD, 5 years remaining

End of Year 1:
Rung 1: 2 year CD, 1 year remaining
Rung 2: 3 year CD, 2 years remaining
Rung 3: 4 year CD, 3 years remaining
Rung 4: 5 year CD, 4 years remaining
Rung 5: 5 year CD, 5 years remaining

End of Year 2:
Rung 1: 3 year CD, 1 year remaining
Rung 2: 4 year CD, 2 years remaining
Rung 3: 5 year CD, 3 years remaining
Rung 4: 5 year CD, 4 years remaining
Rung 5: 5 year CD, 5 years remaining

End of Year 3:
Rung 1: 4 year CD, 1 year remaining
Rung 2: 5 year CD, 2 years remaining
Rung 3: 5 year CD, 3 years remaining
Rung 4: 5 year CD, 4 years remaining
Rung 5: 5 year CD, 5 years remaining

End of Year 4:
Rung 1: 5 year CD, 1 year remaining
Rung 2: 5 year CD, 2 years remaining
Rung 3: 5 year CD, 3 years remaining
Rung 4: 5 year CD, 4 years remaining
Rung 5: 5 year CD, 5 years remaining

Published on January 24th, 2006 - 8 Comments
Filed under: Banking
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About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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Comments (scroll down to add your own):

  1. Good subject. Especially these times with yield curve inverted it’s better if the ladders are short terms. My ladder 3 months apart with 1 year maturity. My plans are to start another ladder to compliment the existing one – I will have maturity dates 45 days apart..

    eg(1/1, 2/15, 4/1, 5/15,7/1, 8/15, 10/1, 11/15..)

    Comment by Geomatryx — Jan 24th 2006 @ 7:04 pm

  2. I’ve never been a big fan of CD’s, but i’ve been giving them a second thought lately. Thanks for the post!

    Comment by Will Kirby — Jan 24th 2006 @ 8:48 pm

  3. I have heard that since interest rates are generally on the rise, that it’s best to do this with shorter term-CD’s, like 6 or 9 month ones to take get the higher rates when offered. ING offers those and I’m trying to get something started so that I have the ladder in 1 month periods.

    I suppose the converse advice is that when rates are falling, either pull out of the ladder into better yielding instruments or buy shorter terms again.

    Actually, what is the point of the ladder? To always have some liquidity coming up?

    Comment by mapgirl — Jan 25th 2006 @ 1:09 pm

  4. mapgirl, it helps you maintain liquidity while at the same to letting you benefit from the (generally) higher rates of longer term CDs.

    Comment by nickel — Jan 25th 2006 @ 1:15 pm

  5. I think CDs are good for short term savings such as a down payment on a car or home.

    I’d prefer to stick with closed end bond funds for my fix portion of my portfolio. I’ve never really been a fan of CDs also, and think there are better options out there.

    Comment by Loi Tran — Jan 25th 2006 @ 1:54 pm

  6. I am interested in investing in CD’s.
    How do i become a member of Penfed?

    Comment by Sam Kouri — Jan 21st 2008 @ 6:14 pm

  7. I know some people who use CD Laddering to be their emergency fund. They started a 6 month CD once a month for 6 months. On the 7th month their first CD matured and they reinvest the interest.. and so on. Eventually they might grow large enough to be worth much more than a months worth of expenses… at which time they could just stop reinvesting the interest earned and use it for something else.

    Comment by Anonymous — Oct 31st 2008 @ 4:33 pm

  8. I am 62 and retired since 57. I have about 600K in 5 yr cd ladder and about 300K in stock mutual funds. The whole purpose of a 5 yr CD ladder is to have required liquidity to pay living expenses while at the same time achieving the relatively high interest rate associated with 5 yr CDs compared to shorter maturities. It seems to me that breaking the 5 yr ladder because CD rates are low is a very bad idea and is a market timing attempt. Part of the reason for building the ladder in the first place is to offer protectionion from low interest rate environments. What looks low now may look not so low a year from now.

    Comment by Al D'Anna — Feb 9th 2009 @ 4:43 am

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