How to Build a CD Ladder

Certificates of Deposit, or CD’s are investment vehicles offered by banks that have a fixed term and earning percent associated with them. A major advantage to CD’s is they are FDIC insured, just like a savings account. Keep in mind though that if you have multiple accounts with the same institution they all count towards your maximum coverage. Typically a CD will offer a higher yield then a regular savings account, however you can’t withdraw the funds, without penalty, for a specified amount of time. Usually the longer the term of the CD the higher return on your investment. The problem is your money is tied up for that investment period. CD Laddering is a way to maximize your returns but continually having CD’s maturing so funds are never more than 12 months away, with a yearly opportunity to invest your money back in at best available rate.

Ally Bank is currently offering the following returns for one through five year CD’s.


As you can see the best return is for the five year CD but if you were only investing $5000 and did not want it all tied up at once you could ladder it. So what you would want to do is purchase five CD’s for $1000 each. One one year CD, one two year CD, etc.. Now you have all $5000 invested but you will have access to at least $1000 after only 12 months. The key to laddering however is reinvesting that $1000 (plus returns) into a NEW 5yr CD. Your resulting CD “Ladder” would then have the following investments

Original Term
Remaining Term
2yrs 1yr
3yrs 2yrs
4yrs 3yrs
5yrs 4yrs
5yrs 5yrs

After your fourth year you will have locked in the best rate you could (a 5yr CD) each year, and will continue to have 1 CD mature every year allowing you to lock in that 5yr rate again and again and still have the security of knowing one of those little bundles of cash will be penalty free this year.

Do you currently maintain a CD Ladder? Share your experiences with us and leave a comment.

Photo: (MNSC)


1 pfincome February 6, 2009 at 9:11 pm

Nice illustration of how to build a CD ladder. I think it is difficult for some people to pick up this concept but I like your simple charts.

2 Lee September 11, 2009 at 1:38 pm

Interesting. CD’s seem to be the UK-equivalent of bonds. I’d never thought of laddering them before though.. thanks for the tip!

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