In this period of low interest rates, many savers aren’t seeing their money produce nearly as much income as they want. Some people want to keep their money in a better interest bearing vehicle. One option for riding our interest rate cycles such as the one we’re experience is a CD ladder.

## What is a CD ladder?

For starters, a certificate of deposit (CD) is a savings instrument that allows you to deposit your savings with a bank or credit union for a set period of time. You’ll get a higher rate than with liquid savings, but will also face a penalty for early withdrawal.

Building a CD ladder simply entails buying CDs in a staggered (overlapping) fashion. Because longer term CDs have higher rates, you can maximize your interest earnings while still having periodic access to a portion of your funds.

You can build a CD ladder on whatever timescale you wish, whether it’s a 12 month ladder with 12 one year CDs, with one expiring/renewing per month, or a five year ladder with 5 five year CDs, one coming due each year.

## Benefits of having CDs

Why would anyone want to use a CD ladder over a regular savings account? There are some distinct advantages to using a CD ladder rather just savings or just putting all of your money in one big CD.

**CDs can provide you with access to higher interest rates.**If you’re looking for a better return than what many savings accounts offer right now, CDs may be your solution.**A CD ladder provides you with flexibility.**The disadvantage of CDs is that, while longer terms (perhaps up to 5, 7, or 10 years) offer better interest rates, your money is locked in for that period of time. What if rates rise or you need the money? There are some no penalty CDs available at some banks, but you usually have to settle for a lower rate.**A CD ladder simplifies the process of finding solid interest rates.**Having a CD ladder can unburden you from constantly rate chasing the latest deal. You know that some of your savings will be available once a year, so you’ll periodically be able to grab a better deal, but you don’t have to be on the constant lookout.**A CD ladder helps you ride out periods of low interest rates.**Since your money is staggered over time, a longer term CD ladder can help smooth out the inevitable ups and downs in interest rates. While buying a CD right now might be painful due to the low interest rates, those that you bought in the past will still be carrying a higher rate, helping to average things out.

## How to set up a CD ladder

Setting up a ladder isn’t complicated at all. It does take some some hunting if you want to find the highest rates on the market, but a number of websites (including this one!) aggregate the best CD rates.

Once you choose a bank or credit union, it’s time to get started. For this example I’ll assume that a person has $10, 000 to put away and I’ll use current rates at Navy Federal Credit Union.

I’ll label the individual CDs A-E for clarity, and I’ll assume that you’re setting up a five year CD ladder. In the first year, here’s how you could deposit your money.

- (A) – $2, 000 in a CD that matures in 1 year with 1.10% APY
- (B) – $2, 000 in a CD that matures in 2 years with 1.55% APY
- (C) – $2, 000 in a CD that matures in 3 years with 2.05% APY
- (D) – $2, 000 in a CD that matures in 4 years with 2.35% APY
- (E) – $2, 000 in a CD that matures in 5 years with 2.80% APY

In the second year, it shifts a bit.

- (B) – $2, 000 will mature in 1 year with 1.55% APY
- (C) – $2, 000 will mature in 2 years with 2.05% APY
- (D) – $2, 000 will mature in 3 years with 2.35% APY
- (E) – $2, 000 will mature in 4 years with 2.80% APY
- (A) – $2, 000 matured and was reinvested into a 5 year CD at the going rate

In the third year, it shifts again.

- (C) – $2, 000 will mature in 1 years with 2.05% APY
- (D) – $2, 000 will mature in 2 years with 2.35% APY
- (E) – $2, 000 will mature in 3 years with 2.80% APY
- (A) – $2, 000 will mature in 4 years with 2.80% APY
- (B) – $2, 000 matured and was reinvested into a 5 year CD at the going rate

In the fourth year, it shifts once again.

- (D) – $2, 000 will mature in 1 years with 2.35% APY
- (E) – $2, 000 will mature in 2 years with 2.80% APY
- (A) – $2, 000 will mature in 3 years with 2.80% APY
- (B) – $2, 000 will mature in 4 years with 2.80% APY
- (C) – $2, 000 matured and was reinvested into a 5 year CD at the going rate

At the end of 4 years, all of the CDs will be set for 5 year maturity dates, giving you the highest return, but still having access to 20% of your funds each year.

You may find it handy to mark the maturity dates down on your calender. I advise using an electronic one to send you a reminder a month before the CD matures so you check rates and decide how to proceed.

If you’re using this strategy for your emergency fund, I would suggest having two or three months of living expenses available in a savings account, and you should also probably consider a shorter-term (one year) CD ladder.

**A few caveats:**

There’s no need to stick to just one bank. You can spread your money across multiple institutions to get the best interest rates at each maturity or time point, though doing so increases complexity.

Note that short term CD rates at some banks lag behind savings account interest rates at other banks. If you’re setting up a ladder, look around and see if investing your shortest “rungs” in CDs is really the best idea. In the example above, you could just hold the 12 month money (CD A) in an online savings accounts at a higher rate than what NFCU is offering (or you could find a better 12 month rate elsewhere).

Penalties vary across banks, so that’s an important factor to consider. If you need early access to the money, or if you want to break the CD and re-invest at higher rates when they rise in the future, you’ll want to minimize your penalties.

Finally, if you’re scared off by the low rates right now, just file this away for a later date. The good news is that, because your money is staggered, you’ll be able to take advantaged of higher rates as your CDs mature and you re-invest.

### Your thoughts on CD Ladders

I’d love to hear your take. How many of you have a CD ladders? Have you had the resolve to maintain it over the past year or two, as interest rates have plummeted? And which banks (or credit unions) seem to offer the best deals?

If you have your emergency fund established you might as well just open a rewards checking account. CD rates are abysmal and RCA’s offer 3-4% yields without early withdrawal penalties.

One additional concept that may be helpful in structuring your CD ladder is “parallel instruments.” The basic idea is to purchase two CDs at a time for 1/2 of the total time deposit (given you have enough money to cover the minimums). If you are faced with a need to draw down funds by breaking a CD, you may be able to pay a penalty for only one of the two identical CDs.

I set up a ladder of 12 12-month CDs as a portion of emergency funds. At ally bank, the rates on even the lowest rate CDs was twice my money market rates at another bank.

Instead of taking a year to set up, I did 3,6,9,&12 month CDs over three months. Then, as they mature, I turn them into 12 month CDs. Setup was faster and ally bank offered to automatically roll them over to 12 month CDs.

I have dropped out of almost all of my ladder CDs at this point. With the economy the way it is, I was finding it to be too much maintenance with to little reward.

My husband and I had talked about using a CD ladder, but we decided against it. At the time, we would have wanted to use short term CDs and the interest rates were actually the same as a savings account. It seemed as though we’d be sacrificing liquidity without any reward. As we get on steadier footing in our finances (and if interest rates ever go up), it may be something we’ll look into again.

I was doing a CD ladder at ING with a one year cycle and trying to have one mature every month. But, they kept changing between 6 month and 1 year to get the best rates, then the CD’s were listing below the current savings rate. Perhaps I will start again one of these days.

We have a 6-month CD ladder at Ally Bank (six 6-month CDs) as our ‘major emergency’ fund. We are currently still adding to them ($250 per month). Which brings me to my point – if you don’t have all the money up front for your EF goal but still want to use a CD ladder, shorter term CDs are a better idea because you can only add to CDs at maturity.

So, we opened each CD, over the course of 6 months, with $500. We then add $250 each month to the CD that’s maturing. When they each get to about $5K, we’ll stop adding to them and just let them roll over (assuming we don’t need the money before then).