How to build a CD ladder
To build a CD ladder, you divide your total savings among several CDs with different term lengths. For example, if you have $25,000 to invest, you might break it up like this:
- $5,000 in a 1-year CD
- $5,000 in a 2-year CD
- $5,000 in a 3-year CD
- $5,000 in a 4-year CD
- $5,000 in a 5-year CD
If these term lengths don't work for you, you could choose different ones. If you prefer short-term CDs, you might choose to spread your money between a 3-month CD, a 6-month CD, a 9-month CD, and a 1-year CD. It's all up to you.
Once your first CD matures, you can spend it or, if you'd like to continue the ladder, you can reinvest it in a new CD. Using our example above, here's how you could do that:
- When the 1-year CD matures: Invest the initial $5,000 plus interest earned into a new 5-year CD.
- When the 2-year CD matures: Invest the initial $5,000 plus interest earned into a new 5-year CD
- When the 3-year CD matures: Invest the initial $5,000 plus interest earned into a new 5-year CD
- When the 4-year CD matures: Invest the initial $5,000 plus interest earned into a new 5-year CD
- When the 5-year CD matures: Invest the initial $5,000 plus interest earned into a new 5-year CD
This gives you access to some of your money every year and eventually, all of your money will be in longer-term CDs that offer higher APYs.
The pros of CD ladders
CD ladders have two key advantages:
- They maximize your long-term interest.
- They give you regular access to a portion of your cash.
Maximize your long-term interest
Long-term CDs tend to offer higher APYs, which means more interest for you. With a CD laddering strategy, you're eventually moving all of your money into longer-term CDs so you can capitalize on these higher yields.
The table below shows what kind of a difference CD laddering can make over a decade. If you invested $25,000 in 1-year CDs that earned a 0.55% average APY, you'd end up with $26,410 at the end of 10 years. That's not a bad profit, but if you'd opted for a CD laddering strategy similar to the one described above, you'd end up with over $1,000 more thanks to the higher APYs from your long-term CDs.