What Is a CD Ladder?

Written by Kim Porter | Edited by Ali Cybulski | Published on 9/11/2024

A CD ladder is an investment strategy that involves distributing funds across multiple CDs with varying terms, from short to long.

A certificate of deposit (CD) can be a great place to store your savings and earn a guaranteed return over a fixed time frame. But it means locking your money away for a period of time and potentially missing out on rising interest rates. A CD ladder is one strategy that can help you overcome those downsides.

By spreading your funds across several CDs of varying term lengths, you can take advantage of competitive rates and unlock your funds at set intervals. Here’s what to know about CD ladders and whether they’re right for you.

What is a CD ladder?

A CD ladder is a savings strategy that involves investing a lump sum of cash across multiple CDs with staggered maturities. It can be a smart alternative to putting all your savings into one long-term or short-term CD.

That’s because each type of CD term comes with pros and cons. Long-term CDs typically offer higher interest rates, but you might not want to lock up your funds for years at a time. If you need to tap a CD before it matures, you’ll often pay an early withdrawal penalty. Short-term CDs can free up your money sooner but may come with lower rates.

A CD ladder can give you the best of both worlds. You can make the most of competitive interest rates and access your money at specific intervals.

How to build a CD ladder

A traditional CD ladder model has five “rungs” with a mix of short-, medium- and long-term CDs. The terms usually increase by one year up to five.

Here are the steps you can take to build a standard CD ladder:

1. Plan your investment. Decide how much you can put in your CDs and whether you want to leave a portion of your savings in another type of account, such as high-yield savings. This option can help you maintain cash flow flexibility.
2. Buy your CDs. Although CD ladders usually have five rungs, you may open as many accounts as you’d like and even spread them across different banks and credit unions to take advantage of the best CD rates.
3. Apportion your funds. Divide your investment across your CDs. You can choose to put the same amount of money in each CD or vary it. For example, you might decide to invest more money in higher-rate CDs than other options.
4. Reinvest when a CD matures. As each account matures, put the money in a new CD with the same maturity as your longest-term account. Reinvesting helps your savings grow while maintaining flexibility. But you might decide to break up your ladder if rates are too low or your savings goals change.
5. Continue the process. Based on your financial goals, you can continue building your ladder as long as you want.

CD ladder example

The details of your CD ladder depend on your overall savings strategy and the amount you’re looking to invest. Let’s say you have $15,000 to invest and spread it evenly across five CDs. Here's an example of a five-year CD ladder that grows with time as you reinvest your savings:

Every time a CD matures, you can decide to reinvest the money in a new five-year CD — each with a new interest rate.

After five years, your ladder will have five CDs, each with a five-year term. One CD will mature yearly. After the second five-year period, here’s what your ladder’s earnings would look like:

In this example, your savings grow from $15,000 to $22,438 in an era of rising rates when you stick to your initial plan.

CD ladder strategies

When building a CD ladder, you can use several strategies. Here are some modifications to the standard CD ladder:

Mini CD ladder

A mini CD ladder still has multiple CDs with staggered maturities, but the terms are shorter than a standard ladder. For instance, you might open five CDs spaced three or more months apart instead of a year. You could build a mini CD ladder out of 3-month, 6-month, 9-month, 12-month and 15-month CDs. This could be a good option if you might need to access your funds more frequently than once a year.

Barbell CD ladder

With a barbell CD strategy, you open one short-term CD and one long-term CD. The two accounts represent the ends of a barbell, hence the name. This strategy allows you to take advantage of today’s higher long-term CD rates while retaining liquidity.

Bullet CD ladder

A bullet CD is another strategy in which you open several CDs of varying term lengths that share a target maturity date. For example, you could open a 5-year CD now, a 2-year CD in three years and a 1-year CD in four years, so they all mature at the same time.

This method can be handy when you’re saving for a large expense. You don’t have to come up with all the funds at once, and you can take advantage of higher rates compared with a savings account.

Pros and cons of CD ladders

Is a CD ladder right for you?

CD ladders can be a good strategy for any saver looking for steady returns in a low-risk environment. For instance, people living in retirement or saving for a financial goal might use a CD ladder. It makes the most sense when interest rates rise or at least hold steady alongside term lengths.

But if shorter-term CDs yield higher rates, you might shorten your ladder to maximize your returns.