How to Build a CD Ladder—and Why

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How to Build a CD Ladder—and Why

“CD laddering can be an effective way to fight the temptation to spend.”

Here’s how it works. You invest equal amounts of money in short-, medium-, and long-term CDs maturing at staggered intervals—like the steps of a ladder. When your short-term CD comes due, reinvest the proceeds in a long-term CD. Eventually your ladder will consist of only long-term CDs, which typically offer higher rates than short-term ones do.


A good example

Say you receive a $1,000 tax refund or bonus from work and you want to fund a ladder. You might build one that matures in one-year increments by investing:

$200 in a 12 month CD

$200 in a 24 month CD

$200 in a three year CD

$200 in a four year CD

$200 in a five year CD

When the 12 month CD matures, buy a new five year CD. When the 24 month matures, buy another five year, and so on. In five years, you’d have only the higher-yielding five year CDs in your ladder—and every year one of them would come due.

Time is your friend

The downside to buying CDs that mature in a year or more is that you lock up your money for that period. (You could access it, but not without paying an early withdrawal penalty.)

If you’d like more frequent access to your money, select CDs that mature quickly—ladder six or three month CDs. A three month CD ladder might be more time-consuming to manage, as you’d be reinvesting distributions more often, but you would increase your liquidity—you’d never be more than a few months away from your money.

Uses, not excuses

Experts generally agree that you should have at least six months of living expenses set aside in case you lose your job—more if you have children and are the sole breadwinner in the family. Rather than stashing all that emergency money in an easy-to-access savings account, use the bulk of it to build a short-term ladder. Stagger the CDs so they mature every quarter. Reinvest the proceeds to perpetuate the ladder—or use the rainy-day cash, if a rainy day comes. Keep in mind that using a CD ladder to hold your emergency fund doesn’t have to tie up all your cash because ideally you’d still have a portion of it in a simple savings account—your money won’t be completely tied up if a leaky roof or car problems require immediate financial attention.

There’s no denying that a CD ladder might not bring you higher returns than stocks would. Equities are great, but they’re also risky. Take advantage of the safety and security that CDs offer: Use them to bring balance to your financial life.