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How to create a CD ladder

CD laddering is a strategy in which you open multiple CDs with different term lengths. Getty Images

A certificate of deposit (CD) can be a great way to keep your savings safe while also earning interest. CDs tend to offer higher interest rates than even high-yield savings accounts, allowing you to grow your savings faster and achieve your financial goals sooner.

However, one drawback of CDs is that they require you to keep your funds in the account for the entirety of the CD term. If you need to withdraw your money before the term is up, you'll face penalty charges that can equal several months' or more worth of interest.

While longer-term CDs tend to have higher interest rates, shorter-term CDs allow you to access your funds sooner. One of the most effective ways to maximize both benefits is by creating a CD ladder.

CD laddering is a strategy in which you open multiple CDs with different term lengths. By staggering the maturity dates, you provide regular access to your funds while taking advantage of long-term CDs' higher interest rates. Plus, CD laddering is simple to do.

See current CD rates here to see how much you could be earning.

How to create a CD ladder

Build your own CD ladder by following these steps.

Set your savings goals

The first step to creating a CD ladder is setting financial goals. Determine how much you want to save and the duration of your savings plan. For example, perhaps you want to build an emergency fund over the next five years, and you have $10,000 to invest.

This will help determine how many CDs you need to open and how much to put into each.

Chose the right CDs

The next step is to identify the right CDs to invest in. Consider the interest rates offered by different institutions and choose the ones that provide the best return on your investment at different term lengths.

You do not need to open your CDs with the same bank or credit union, either — you can shop around to maximize your earnings.

Divide your savings among all CDs

The last step in creating a CD ladder is dividing your savings among your CDs. Using the down payment example above, here's how you might divide your money if you had $10,000 to save over five years:

  • $2,000 in a three-month CD at 4.75% APY
  • $2,000 in a six-month CD at 5.35% APY
  • $2,000 in a one-year CD at 5.50% APY
  • $2,000 in a three-year CD at 4.75% APY
  • $2,000 in a five-year CD at 4.60% APY

You don't need to divide your savings up equally, however. For instance, if one CD offers a higher rate than all the others, you may want to put more of your money in that account. Or, if you'd like to access more money in the beginning, you can put more into your short-term accounts. How you divvy up your funds is up to you and your needs.

Managing your CD ladder

Once you've created your CD ladder, it's important to maintain it by keeping track of your maturity dates. Once a CD matures, you can cash it out if you need the funds now or reinvest the funds into a new CD at a higher interest rate if you want to continue earning interest.

Find the right CDs for you online today.

The bottom line

A CD ladder can be a great way to grow your money while ensuring access when you need it. By staggering your investments to mature at different times, you can provide yourself with the flexibility you need while also earning the most interest. With proper planning and careful execution, you can create a CD ladder that helps you save more and reach your financial goals faster.

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