How to build a CD ladder and maximize your returns

If you’re looking for a way to balance earning higher interest on your savings with keeping some cash accessible, a certificate of deposit (CD) ladder might be the right strategy.

A CD ladder involves splitting your money across multiple CDs with staggered maturity dates. This way, you get regular access to your funds while still earning the best CD rates often offered on longer-term CDs.

Here’s how to successfully set up a CD ladder and maximize the interest earnings on your savings.

CDs can be an attractive savings option because they offer fixed interest rates. That’s especially important when interest rates are trending downward (which is the case whenever the Federal Reserve cuts its rate).

Of course, the downside is that in order to earn that guaranteed rate, you have to commit to keeping your money on deposit for a certain period of time; if you pull out your funds ahead of schedule, you’ll be subject to an early withdrawal penalty.

That’s where CD laddering comes in — it’s a strategy that involves spreading your money across multiple CDs with staggered maturity dates instead of investing all your funds in a single CD with one set term length.

With a mix of short and long CD term lengths, you can get the best of both worlds: Higher APYs on long-term CDs and quicker access to funds on short-term CDs.

For example, say you have $10,000 in savings, and the bank you’re working with has a $2,000 minimum deposit for its CD accounts. Here’s a quick example of how you might structure your CD ladder, with total returns calculated with compounding monthly interest:

Each time one of your CDs matures, you can reinvest it by opening another five-year CD, ensuring that you’ll always have one CD maturing each year.

Read more: Can you still get a 5% CD?

Before you decide to implement the CD laddering strategy, it’s important to understand both the advantages and disadvantages of this approach:

• You can lock in high APYs with both short-term CDs and longer-term CDs, especially if interest rates are expected to drop.

• You’ll be able to improve your liquidity through short-term CDs.

• If interest rates rise, you can take advantage of the new rates as your short-term CDs mature.

• If interest rates fall, reinvesting funds from maturing CDs may result in lower returns.

• A large chunk of your money may still be inaccessible for a long period of time.

• CD rates usually don’t keep up with inflation, so you may be able to get a better return elsewhere.

Building and maintaining a CD ladder is relatively straightforward. Here are some steps you can follow to get started.

Each financial institution has its own set of CD rates and terms, so you’ll want to shop around for the best CD rates currently available. And keep in mind that the best rates for shorter-term CDs might be at a different bank or credit union than the ones offering the best long-term rates. So, your CD ladder may include accounts at multiple financial institutions.

As you research and compare your options, pay special attention to the following features:

• APYs for each term you’re interested in using

• Minimum deposit requirements for each account

• Early withdrawal penalties

Also, keep in mind that some CDs may offer special features, such as promotional CD rates for a few months, no-penalty withdrawals, or the ability to bump up the rate or add another deposit after opening the account. That said, these CDs typically offer lower APYs than standard fixed-rate CDs.

Determine how many CDs you want to open and which terms you feel comfortable with. While we use one-year increments in our example above, you can determine your own cadence for maturity — some banks offer terms ranging from one month to 10 years, depending on your needs.

If you anticipate needing any of the money you’re planning to save in the near term, consider shorter terms to start. But if you truly won’t need the money and want to keep it somewhere safe, you may be able to go for longer terms.

Read more: Are 10-year CD rates​ worth it?

Once you’ve figured out how to set up a CD ladder strategy, open the accounts with your chosen bank or credit union.

Remember, once you open the accounts and deposit the funds, you typically won’t be able to access them again until the CD matures (unless you want to pay an early withdrawal penalty). So, only open an account once you’re ready to commit.

Depending on your situation and needs, you may decide to cash out each CD as it reaches maturity or reinvest it, matching the longest initial CD term. You’ll keep doing this each time a CD matures until you’re ready to stop completely.

Financial institutions typically set CDs to renew automatically, but you’ll typically get one to two weeks to withdraw the money, known as the grace period. You can hold on to the funds or put them toward a new CD before they become unavailable again.

Adjust your CD laddering strategy as necessary, depending on your need for liquidity and interest rate fluctuations over time. Today’s best CD rates won’t necessarily be the same as the best rates six months or a year from now, so reassess your approach over time.

It’s also important to consider the direction interest rates are moving. Adding new CDs may not be as appealing as other ways to invest your money if rates are going down. But if interest rates are on the rise, you may want to increase your deposits with new CDs.

Based on your situation and need for liquidity, there are several alternatives to the CD laddering strategy to consider before you proceed. Here are just a few to compare.

A high-yield savings account (HYSA) offers much higher APYs than traditional savings accounts, and some banks and credit unions offer rates comparable to what you can get with a long-term CD.

A high-yield savings account is worth considering if you always need access to your funds. However, your APY is variable and will fluctuate over time.

Bonds don’t offer the guaranteed returns of a CD, but if your goal is to avoid the volatility of stocks and other investments, bonds can provide a relatively safe return. Sometimes, they can offer higher returns than you’d get with a CD.

Bond funds typically charge fees, which eat into the return you get on your money. And while they’re less risky than other types of investments, there’s still some risk involved.

Dividend stocks pay dividends to their investors, providing regular income and the potential for price appreciation. Companies that pay dividends to their shareholders are typically well-established and have less price volatility than stocks that don’t pay dividends.

That said, you’re still investing in stocks, which are susceptible to both company-specific and market risks. If your priority is to keep your money safe, there may be better ways to go than stocks.

Money market accounts (MMAs) are deposit accounts used to build savings and earn interest. Like savings accounts, you can continually add funds as you save for your goals.

Generally, money market accounts pay higher APYs than traditional savings accounts, and some online banks offer even higher APYs that are roughly 10 times the national average for savings accounts.

Unlike savings accounts and CDs, money market accounts are much more accessible with check-writing privileges and debit card access. However, there are usually limits on how many withdrawals or transfers you make per month, and your bank or credit union may charge you additional fees if you exceed that number.

Yes, like other deposit accounts, your CD is typically federally insured, either through the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). FDIC-insured and NCUA-insured funds are covered up to $250,000.

When a CD matures, your bank or credit union will give you a grace period of several days past the maturity date. You’ll need to decide whether to withdraw your funds from the CD or roll it over into a new CD, ideally one with a higher APY if possible. In most cases, if you do not withdraw your funds and the grace period passes, your bank or credit union will automatically renew the CD.