How Does CD Laddering Works? Know The Pros and Cons

With CD laddering it can help you generate a stream of interest income while freeing up your cash at regular intervals. This article explains how this strategy works.

How Does CD Laddering Works? Know The Pros and Cons

A CD ladder is a savings strategy that involves using multiple CDs to earn interest across different periods of time. There are certain benefits associated with using a CD ladder to save.

One of the most common reasons for constructing a CD ladder is to help avoid paying early withdrawal penalties, while still earning higher interest rates.

If the idea of locking away your money for one to five years in a single CD is daunting, then a CD ladder may be for you.

What is a CD Ladder?

Building a CD ladder isn’t as complicated as it sounds. CD laddering involves a saver buying multiple CDs at once that mature at different intervals.

For example, while you’re opening a one-year CD, you could open a three-year and five-year CD at the same time.

CD ladders leave room for plenty of flexibility. You can put equal amounts of money into each CD, or you can decide how much money will go in each account depending on the current economic climate.

You don’t even have to open all of the CDs at the same institution. You could buy three CDs from three different banks and credit unions based on which one has the highest rate.

The Pros and Cons of CD Laddering


  • You can easily access your money
  • It is more flexible and convenient
  • Offers higher interest rates and returns
  • Very secure


  • The certificate has to mature in order to withdraw
  • Short-term CDs have very low-interest rates

How CD Ladders Work


When you purchase a CD, the money is held in your account until it reaches its maturity date. At the end of the term, you have access to your original investment plus the interest it earned.

Typically, CDs offer a better rate than a savings account, which is the reason for parking your savings in a CD. It’s a pretty clear-cut decision. The complication is choosing the term length.

Typically, interest rates go up with term lengths, e.g., a five-year CD offers a higher rate than a one-year CD. No doubt, you want the higher rate.

The problem is that it may not be smart to lock up your money for so long. You might need the money. Also, rates might rise even more while you are locked into your rate for years.

This is where a CD ladder is useful. As noted above, to build one, you buy multiple CDs with staggered maturity dates. This gives you a range of interest rates and term lengths.

As each CD matures, you renew it for the longest term in order to get the highest interest rate.

For example, you buy one-year, two-year, three-year, four-year and five-year CDs, earning 1%, 1.25%, 1.5%, 2.0% and 3.5%, respectively. When the one-year CD matures, you renew it for five years at 3.5%. So now, your five CDs are earning 1.25%, 1.5%, 2.0%, 3.5% and 3.5%.

After three more years (and renewals), all your CDs will be earning 3.5% (assuming interest rates stay the same), with one CD maturing every year.

What to Look for When Creating a CD Ladder

Bank Reputation

Choose banks and financial institutions with a thriving reputation in the area. You can look up reviews from customers and expert rating sites to gather more insights about the nature of services provided, customer service, offers and quality.

Account Opening and Management Policies

Most banks have minimum and friendly requirements for opening personal savings accounts. Simply go through all the terms and compare them with other alternatives before making your final decision.

Also note the minimum deposit required for every CD account you open.

Interest Rates

Banks with higher interest rates are obviously more attractive. Compare annual percentage yields against length of time to determine the best deals for your savings.

You can also check if early access is allowed and how it affects your interests.

Security Features

Choose secure banks that can guarantee your money will be safe. They should also be members of FDIC (US) or FSCS (UK). They should also offer seamless customer support and communication.

Other security features include regular virus sweeps, encrypted communication, firewall and SSL.

Money Accessibility

Some banks offer checking accounts and ATM deposits/withdrawals while others don’t. Some have local branches while others only offer online platforms.

Make sure you understand and are comfortable with the nature of the CD service provider before depositing cash with them.

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Benefits of CD Laddering

There are several reasons to consider using a CD ladder to save, versus parking your money in a savings account or money market account.

Taking Advantage of Higher Interest Rates

When opening a CD account, getting the best annual percentage yield possible may be one of your top priorities. Every bank and credit union is different when it comes to determining which rates to apply to CDs. But, generally, the longer the CD term, the higher the APY.

Creating a CD ladder allows you to take advantage of higher rates without having to put all of your money into a single CD for a single period of time.

Capitalizing on Interest Rate Changes

Interest rates aren’t set in stone and, when rates rise, that’s an opportunity for savers. By laddering CDs with varying maturity terms, you’re in a position to take advantage of higher rates when they come along.

Say that you have a CD maturing in the next month and, thanks to an interest rate increase, your bank is now offering 2.00% versus the 1.75% you were getting on your current CD.

You could roll the money into a new CD to lock in that higher rate.

At the same time, a CD ladder can help insulate you against interest rate declines. If rates go down and banks offer savers a lower APY, you’ve still got the benefit of earning higher rates on the longer-term CDs you’ve already opened.

Avoiding Early Withdrawal Penalties

CDs are time deposits, meaning you’re committing to saving money in them for the duration of the maturity period. Withdrawing money from a CD before it matures often triggers a penalty, which typically means forfeiting some or all of the interest you’ve earned so far.

Having a ladder of CDs with maturity dates spaced out can help reduce your odds of triggering an early withdrawal penalty when you need access to cash.

If you’ve spaced out CDs every six months, for example, you might simply wait until your next maturity term to make a withdrawal.

Saving for Different Financial Goals

A CD ladder can also be useful when saving for a mix of short- and long-term financial goals.

Say your goals include setting aside money for a vacation and putting money away for a down payment on a home over the next five years.

You could use a six-month CD to save for your trip, while putting money toward a home into a three- or five-year CD.

The shorter-term CD means you’ll be able to withdraw the money without penalty when it’s vacation time. The longer-term CD could allow you to earn a higher APY on savings and grow your down payment fund faster.


1. What is a CD Ladder?

This refers to a savings strategy that involves splitting your savings and depositing them into multiple CD accounts with staggered maturity dates. You then have to keep re-investing these funds as they mature into different longer-term and higher interest rate CDs with the goal of having all your CDs locked in high reward schemes.

2. Can I lose money when CD laddering?

No. Most CDs are offered by credible banking institutions – either online or main-street – of solid repute that are also licensed and regulated by the different national finance regulatory agencies. In the United States, your deposits with these institutions are also insured by FDIC – for commercial bank savings – and NCUA – for savings held with credit unions.

3. What is the best maximum term for the CD ladders?

The answer to this is highly dependent on your need for income and access to your funds. If you are after regular incomes and easier access to your funds, consider the short-term CDs, usually the three- six-month CDs or the longer term CDs, up to ten years, if you are after maximal returns.

4. How do I create A CD Ladder?

Start by identifying a CD rate service provider with the most attractive interest rates and fixed terms that suit your income and cash access needs. Then split your savings into equal parts depending on the number of ladders you would like to maintain and save.

While laddering your CDs is a good way to keep your principal safe while ensuring intermittent access to your cash, you should still think twice before locking your money away in the bank.

Even in a best-case scenario, CDs only offer limited growth, and if you’re saving for the future with CDs, you risk coming up short at the end of the day.

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