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What is CD laddering?

A CD ladder helps you regularly access your funds while avoiding early withdrawal penalties. TH YAPR/Getty Images

A certificate of deposit (CD) is a savings account that offers several unique perks. Unlike regular and high-yield savings accounts, CD interest rates are fixed, so you'll continue to earn the same amount even if interest rates drop. And these rates are often higher than even high-yield savings accounts offer.

In exchange for these perks, you agree to keep your money in the account for a set period (typically six months to five years). If you withdraw funds before this term expires, you incur penalty charges. Penalty amounts vary by institution, but they can easily wipe out any interest you've earned on your money.

Having your money locked up for a certain period can be helpful if you want to grow your savings without the temptation to dip into them right away. But if you need the money sooner — or if you want to access regular returns — it can be a drawback.

One way to get around early withdrawal penalties is CD laddering. In this article, we'll explore what CD laddering is, how it works and how to create your own CD ladder.

To learn if a CD is right for you, check out current CD rates here.

What is CD laddering?

CD laddering is splitting your deposits among several CDs with staggered term lengths. This way, your CDs reach maturity at different times, giving you regular access to your funds while allowing you to continue earning interest on longer-term CDs (which tend to have higher rates).

A traditional CD ladder has five "rungs" (CD accounts) that mature over five years, but you can create your ladder however you want to suit your needs.

Explore current CD rates now to see how much you could be earning.

How CD laddering works

Let's say you have $2,000 to invest in CDs. To create a CD ladder, you might invest it as follows (we're using the highest interest rates available for the week of April 11, 2023):

  • $400 in a three-month CD at 4.75% interest
  • $400 in a six-month CD at 5.25% interest
  • $400 in a one-year CD at 5.25% interest
  • $400 in a two-year CD at 5.35% interest
  • $400 in a three-year CD at 5.35% interest

Over the next three years, each CD will mature at the end of its term. You can then cash out the funds or reinvest them in a new CD with a higher interest rate, adding another rung to your ladder and increasing your earnings.

Note that you don't have to split up your deposits equally. For example, if one of the CDs in your ladder offers a higher interest rate than the others, you can put more money into that account. Or, if you'd like to access more money sooner, you can frontload your ladder by investing more in shorter-term accounts. Play around with different structures to see what works best for your goals.

Also, bear in mind you don't have to open your CDs at the same bank or credit union. By shopping around for the best rates, you can maximize your earnings from your CD ladder.

The bottom line

If you're looking for a predictable return on your investment, a CD ladder can be a great strategy. It allows you to enjoy regular access to funds provided by short-term CDs and the higher interest rates of longer-term ones. As with any financial product, make sure to do your homework and compare your CD options to lock in the highest rates possible.

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