How to Build a CD Ladder

A close friend recently asked if I used CDs (Certificates of Deposit) and would recommend them. So I thought I'd share my thoughts on CDs and tips on how to build a CD ladder.

Let me start by saying that CDs are not great investments if you want to grow your wealth. Because they have such low risk, their rates of return are also very low. The annual percentage yield (APY) of CDs usually falls somewhere between 1%-5%. Not great at all. Sometimes, the APY can even fall well below 1%. Meanwhile, inflation erodes your returns by about 3% each year.

At best, CDs will slow the leak in your financial bucket. If you want to finish the rat race early, you should instead focus on opportunities that get double-digit returns on your money. That said, CDs can offer a place to park cash until you find these opportunities.

I briefly touched upon CDs in my previous post. This time, let’s go over how to open CDs and set up what’s known as a CD ladder.

THE DRAWBACK TO CDs

This brings me to a very important point about CDs. Low rate of return aside, the biggest drawback to CDs is their lack of liquidity.

CDs offer you a guaranteed fixed rate of return in exchange for leaving the money untouched for a set term. This term could be as short as a month to as long as several years. You decide how long the CD’s term will be.

The end of a CD's term is known as the maturity date. This is the date when your original investment and any interest earned are returned to you. When you open a CD, you are agreeing not to touch that money until this date.

If you do decide to withdraw any of the money before the maturity date, you will pay a penalty. Usually, the penalty is a percentage of the interest earned. Sometimes, though, it can be a set dollar amount. In this case, if the interest doesn’t cover the entire penalty, your original investment will be tapped. You could end up with less than what you had before opening the CD.

This leads us to the number one rule to follow with CDs: Never open CDs with cash you might need in the near future.

WHY AND HOW TO BUILD A CD LADDER

A CD ladder is a workaround for this major drawback. With a CD ladder, you can access your cash on planned intervals with no early withdrawal penalty.

Money can be withdrawn from CDs on planned maturity dates.

The simple strategy entails opening multiple CDs with staggered maturity dates rather than putting all money into a single CD. For example, 25% of your money could be in a CD that matures in October. Another 25% could be in a CD maturing in November. The remaining cash could then be divided evenly into CDs maturing in December and January.

In this way, a portion of your money will be available to you on each of those months. Keep in mind, you’ll still need to wait until the exact maturity date to access it penalty-free. At that time, you can use that money however you want. Pay bills. Invest in something with a higher return. Or open another CD and add another rung to your CD ladder.

WHERE TO OPEN A CD

CDs are just a type of savings account. You can open CDs at any traditional or online bank. Generally speaking, online banks will offer better rates and terms. You can read more about online banks in my previous post. I’ll leave a link at the bottom of this post.

SETTING THE MATURITY DATE

Two factors determine the maturity date of your CD: when the CD is opened and the length of the term. You’ll use both to set up the rungs of your CD ladder.

Let’s look at the first factor. The CD’s term begins on the date it’s opened. As soon as you open a CD, the countdown to its maturity date starts.

Knowing that, one way to create a CD ladder would be to open CDs on different dates. In the previous example, let’s assume all four CDs have a 3-month term. If each CD matures in three months, you could create the ladder by opening CDs in July, August, September, and October.

The second way to set up a CD ladder is by choosing different maturity dates. When you open a CD, you will need to decide the length of the CD’s term.

This raises the question: How long of a term should you choose?

It is important to know that often, but not always, different term lengths will have different yields. Normally, longer terms offer better yields than shorter terms. Hence, a 2-year CD would offer a higher APY than a 6-month CD.

As of this writing, though, the opposite is true. CDs with shorter terms are offering higher APYs. Ally Bank, for example, is currently offering a 6-month CD with a 3.90% APY while their 5-year CD has a 3.50% APY.

You’ll occasionally even find banks offering the same yield no matter the term length. Ultimately, your choices will be limited to what your bank offers. Every bank offers different term lengths.

So, should you decide on term length based on the APY? Not necessarily. There are two reasons for this.

• Reason 1: There are many other investment options generating much higher returns. If you seriously want to grow your wealth, look at other options. Stocks, index funds, and real estate, for example, can all generate higher returns. CDs simply are not tools to reach financial freedom.

  
  

• Reason 2: You could miss out on better opportunities for your money if it’s locked into a long-term CD. The last thing you’d want is your money to be locked into a 10-year CD with a 0.03% APY. You’d be better off putting that money in an index fund for 10 years, generating 10% annually.

CDs should be looked at as short-term investments. Locking money in a CD for longer than a year and a half generally doesn’t make much sense. So, rather than prioritizing the highest APY, prioritize liquidity. Look for the highest APYs available with short terms of less than 18 months.

Stay liquid. Create your CD ladder by staggering when accounts are opened and varying the term lengths. And again, never use money you may need in the near future.

DON’T MAKE THIS MISTAKE WITH YOUR CD!

If you open CDs, pay close attention to their maturity dates. In fact, set up calendar notifications on your smartphone for each CD. At the very least, write the dates down somewhere you will see them.

Here’s why. Upon maturity, the money you deposited into the CD and any interest earned are returned to you. BUT only if you elect for that to happen.

Every CD includes instructions for what to do with the money upon maturity. The default setting for CDs is to automatically roll over all funds upon maturity into another CD. The new term length and APY could be very different from what you previously had. And once rolled over, your money is locked up again.

Here is what Bank of America is offering for its CDs as of this writing.

Bank of America’s Flexible CDs/IRAs offer a 3.51% APY with a 12-month term. This APY is actually somewhat competitive. But guess what happens at maturity?

Unless instructions are changed, all funds automatically roll over into a new 3-month CD with an APY of just 0.10%!

To avoid something like this, it’s very important to update the maturity instructions for your CDs. You may be able to update the instructions immediately after opening the CD. Otherwise, you could need to wait until closer to the maturity date. Either way, you don’t want to miss that window, so set reminders for yourself!

ARE CDs BETTER THAN REGULAR SAVINGS ACCOUNTS?

Normally, CDs offer a higher interest rate than savings accounts. How much higher will depend on the bank and the term length. Weigh the restricted access to your money against the interest rate to determine if a CD makes sense to you. Ask yourself if it’s worth it to lose access to your money in return for the higher interest rate.

Sometimes a CD’s interest rate could be just a fraction of a percentage point higher than a savings account. In this case, you probably won’t see a significant dollar difference in the return.

It’s also not unusual to find CDs paying the same rate as a savings account. Obviously, it makes no sense to open one of these CDs. You lose access to your money with nothing gained in return.

AN HYSA AS AN ALTERNATIVE

If you want easy access to your money or the CDs’ interest rates aren’t wowing you, perhaps consider a high-yield savings account (HYSA). An HSYA is simply a savings account that pays a higher APY than a regular savings account.

Even if you choose to open CDs, it still makes sense to open an HYSA. The two work well together.

I covered HYSA in more detail in my previous post. See the link below. Check it out if you’re interested.

If you've found the information helpful, feel free to leave a comment below.

See you at the finish line!

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Disclaimer: I’m not a licensed financial professional. This blog shares my personal experiences and opinions around money, investing, and early retirement. It’s for informational and educational purposes only—not financial, legal, or tax advice. Always do your own research or consult with a qualified professional before making any financial decisions.