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What is a Certificate Ladder and is it right for me?

What is a Certificate Ladder (also known as CD Ladder) and how does it work?

A CD ladder is a series of certificates of deposit with rotating maturity dates.

Instead of locking up all your money in one CD, you spread it out across multiple CDs with staggering term lengths and interest rates.

When a CD matures, you can reinvest your money by electing to automatically roll it into another long-term CD where it goes to the back of the line, while the other CDs move up in line. This cycle is known as the “laddering effect.”

This technique is a more secure, steady way to grow your savings — and you still get access to your money periodically when each CD matures, just in case you need it for some reason or want to switch to a higher-earning investment.


How do I build a CD ladder?
There’s no single perfect CD ladder strategy for everybody. You can put your money in a mix of short- and long-term CDs that best suit your investment time frame and your need for income and liquidity.

Here’s one example of how to create a CD ladder.

  • Step 1: Open the CDs
    • Let’s say you have $20,000 to invest. How do you want to split up the money? For this example, you decide to divide your money into four equal parts and open four CDs at once. To set up the “laddering effect,” stagger the maturity dates so they align with when you need the money:
    • CD 1: $5,000 in a six-month CD
    • CD 2: $5,000 in a 12-month CD
    • CD 3: $5,000 in a three-year CD
    • CD 4: $5,000 in a five-year CD
    • Finally, mark your calendar so that you know when each matures. This gives you plenty of time to make a decision about reinvesting the money or cashing out.
  • Step 2: Reinvest the money
    • Here’s the “hands-on” part of building a CD ladder. As your CDs mature, the bank may give you a grace period in which you can withdraw money, add money or change the term. Instead of just letting your CD roll over, look around for a new CD with a better rate. Longer-term CDs, such as five years, often get higher returns.
  • Step 3: Repeat or cash out
    • Every time a CD becomes due, ask yourself whether you need the money for one of your financial goals — or whether you can roll all (or part) of it into a longer-term CD at a higher interest rate. If you determine the money is better invested elsewhere, then cash out the CD and put it elsewhere. Otherwise, be sure to shop terms and rates for an option that works for your goals.


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Article Credit:  Tim Devaney from Credit Karma