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What Is a CD Ladder?

Banking, CDs
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Certificates of deposit, or CDs, typically have the highest interest rates among government-insured savings products. That makes them ideal for people who want to bolster their nest egg without assuming much risk. But a set-it-and-forget-it approach isn’t the only way to use a CD.

Building a CD ladder can be a useful tactic to further personalize your savings strategy. Here’s a closer look at how it works and how to build the perfect CD ladder for you.

How CD ladders work

The price for getting higher interest rates is that you agree to lock in your money for a set time period, sometimes up to five years. The longer a CD’s term — and the larger your deposit — the higher your rates.

While your money is locked away, interest rates could increase, and you wouldn’t be able to take advantage of them. Or an emergency might leave you in desperate need of that cash. But withdrawing funds before the maturity date typically triggers steep penalties.

CD laddering addresses these concerns. It involves buying smaller CDs that mature at staggered dates, rather than a single long-term CD. This strategy provides several benefits:

  • Liquidity: Your cash will be available to you at frequent intervals.
  • Flexibility: You can decide how you want to split up your investments.
  • Better interest rates: You’ll be able to choose longer-term CDs with higher rates and still have certificates maturing on a regular basis.
  • Peace of mind: If interest rates go up, you’ll have cash to invest in new CDs. And if rates fall, you still have money invested in long-term CDs that come with higher rates.

» MORE: What is a CD?

Classic CD ladders

The traditional CD ladder model divides your investment evenly over five CDs, with one CD maturing each year. If you had $10,000 to invest, your funds could be spread out like this:

  • $2,000 in a 12-month CD.
  • $2,000 in a 24-month CD.
  • $2,000 in a 36-month CD.
  • $2,000 in a 48-month CD.
  • $2,000 in a 60-month CD.

You begin seeing the payoff at the end of the first year. After your 12-month CD matures, you can reinvest that money in a new 60-month CD. When the second year ends, you can continue this pattern by reinvesting the money from your original 24-month CD in another 60-month CD. You’ll eventually reach a point where your ladder is made up entirely of long-term CDs, which earn the most interest.

One CD will mature each year, meaning you can either continue investing in 60-month certificates or move the proceeds to your checking account.

Alternative CD ladder structures

Dividing your investment equally among certificates isn’t the only option. Some people like to build their ladders based on economic projections. When the direction of interest rates is fairly clear, you may want to approach your CD ladder a little differently.

When interest rates are rising, consider investing a higher percentage of your funds in shorter-term CDs. When rates are going down, aim to lock a higher percentage of your investment in the longest-term CDs you can afford. Keep in mind that a ladder with equally divided investments offers the widest safety net for your portfolio growth.

» MORE: What the Fed rate increase means for your CDs

Your perfect ladder

One of the best things about laddering is that you don’t have to follow a single model. Your perfect CD ladder is built to suit your investment time frame, need for income and liquidity, and comfort level when investing according to projected economic changes.

To find the best deals for your CD ladder, visit NerdWallet’s CD rate comparison tool.

Tony Armstrong is a staff writer at NerdWallet, a personal finance website. Email: tony@nerdwallet.com. Twitter: @tonystrongarm. Product manager John Gower contributed to this article.

Updated Dec. 6, 2016.