What is CD Laddering?

Posted on May 22nd, 2024

When it comes to saving money, especially for short to medium-term goals, Certificate of Deposit (CD) accounts are a popular choice among investors. CDs offer a safe and predictable way to grow your money with a fixed interest rate over a specified period. However, if you are looking to optimize your CD investments for better returns and liquidity, CD laddering might be an effective strategy for you.

What is a Certificate of Deposit (CD)?

A Certificate of Deposit, commonly referred to as a CD, is a type of savings account offered by financial institutions. Unlike regular savings accounts, CDs have fixed terms ranging from a few months to several years. During this term, the account holder agrees not to withdraw funds from the CD. In return, the bank offers a higher interest rate than a traditional savings account. Essentially, it’s a way for individuals to earn a fixed interest rate on their savings over a specified period.

Benefits & Drawbacks of a CD


  1. Fixed Interest Rates: One of the main advantages of CDs is the predictability of returns. Since the interest rate is fixed for the duration of the CD term, investors know exactly how much they will earn.
  2. Low Risk: CDs are considered low-risk investments because they are insured by the Federal Deposit Insurance Corporation (FDIC) up to a certain limit. This makes them an attractive option for conservative investors.
  3. Diversification: Adding CDs to your investment portfolio can provide diversification, spreading out risk across different asset classes.
  4. Discourages Impulse Spending: Withdrawing funds from a CD before the maturity date usually incurs penalties, which can discourage impulsive spending and promote disciplined saving habits.


  1. Limited Liquidity: Unlike savings accounts, CDs typically have penalties for early withdrawal. This lack of liquidity can be a drawback if you need access to your funds before the CD matures.
  2. Interest Rate Risk: If interest rates rise after you have locked in a CD rate, you may miss out on potentially higher returns elsewhere.
  3. Inflation Risk: Since CD interest rates are fixed, there is a risk that inflation could effect the purchasing power of your returns over time.

What is CD Laddering?

CD laddering is a savings strategy that involves spreading your investment across multiple CDs with staggered maturity dates. Instead of investing a lump sum into a single CD with a fixed term, you divide your investment equally or proportionally into CDs with different maturity dates. As each CD matures, you reinvest the proceeds into a new CD with the longest term, thereby creating a ladder-like structure.

How Does CD Laddering Work?

Let’s illustrate CD laddering with an example of a $6,000 investment. Instead of putting the entire amount into a single CD, you could divide it into six separate CDs.

  • Month 1: Invest $1,000 in a 6-month CD
  • Month 2: Invest $1,000 in a 6-month CD
  • Month 3: Invest $1,000 in a 6-month CD
  • Month 4: Invest $1,000 in a 6-month CD
  • Month 5: Invest $1,000 in a 6-month CD
  • Month 6: Invest $1,000 in a 6-month CD

At the end of month six, you will have invested the full $6,000. At month seven, the initial 6-month CD you opened in month one will mature. You can decide to either close this CD and withdraw your money or continue the CD for another 6-month term. By this example, you have the option to access a portion of your funds every month due to the staggered maturity dates, while still benefiting from the higher interest rates typically associated with CDs.

Benefits of CD Laddering:

  1. Liquidity: With CD laddering, you have regular access to a portion of your funds as each CD matures. This provides liquidity and flexibility, allowing you to reinvest or use the money for other financial needs without incurring early withdrawal penalties.
  2. Interest Rate Optimization: By spreading your investments across different CD terms, you can take advantage of potentially higher interest rates offered on longer-term CDs while still maintaining access to a portion of your funds at shorter intervals.
  3. Risk Management: CD laddering helps mitigate interest rate risk. If interest rates rise, you can reinvest the matured CDs at the new, higher rates. Conversely, if rates fall, only a portion of your funds is locked into longer-term CDs, minimizing the impact on your overall portfolio.
  4. Steady Income Stream: For those seeking regular income, CD laddering can provide a steady stream of cash flow as CDs mature and funds become available for withdrawal or reinvestment.

Considerations and Tips:

  • Align with Financial Goals: Tailor your CD ladder to align with your financial goals and timeline. For shorter-term goals, opt for shorter-term CDs, while longer-term goals may warrant longer-term CDs for higher yields.
  • Stay Flexible: Periodically review and adjust your CD ladder to adapt to changing financial circumstances, interest rate environments, and investment goals.
  • Emergency Fund Component: While CD laddering offers liquidity compared to a single long-term CD, it may not provide immediate access to funds in case of emergencies. Ensure you maintain a separate emergency fund in liquid assets like savings accounts or money market funds.

CD laddering is a simple yet effective investment strategy that offers the benefits of fixed returns, minimal risk, and liquidity. By strategically staggering CD maturities, investors can optimize their returns while minimizing drawbacks associated with traditional CDs. As with any investment strategy, it is essential to assess your financial goals and risk tolerance before implementing CD laddering into your portfolio.

If you are interested in opening a CD of your own, visit your local financial center or open an account directly online.



The material on this site was created for educational purposes. It is not intended to be and should not be treated as legal, tax, investment, accounting, or other professional advice.

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