Rising federal interest rates are making CDs more appealing for many consumers — but as they continue upward, locking your money away at a fixed rate could mean losing out on higher interest in a few months. A CD ladder can help.
For instance, in January, the average 1-year CD rate was 0.13%, according to FDIC data. In just six months, though, the average 1-year CDs are at 0.25% APY as of June 2022. If you put your money in a CD earlier this year, as they started to improve from pandemic-era lows, you wouldn’t benefit from the increased rates today. And federal interest rates are expected to continue to rise in the coming months, as the Federal Reserve works to combat inflation.
To take advantage of both today’s APYs and the expected higher rates to come, you can build a CD ladder with terms that work for your goals. Here’s how CD ladders work, and how you can grow your savings using this savings strategy based on today’s rates:
What Is a CD Ladder?
A CD ladder is a savings strategy made up of multiple CDs that all mature at different times. This allows you to keep your savings liquid, with your overall principal spread across different CDs.
Once each CD matures, you may choose to take your money out of the CD or roll it into a new CD. In a rising rate environment, this allows you to keep up with increased rates over time.
However, a CD ladder isn’t a set-it-and-forget-it strategy. You’ll need to monitor your open accounts, and track your balances to take full advantage of different rates.
A certificate of deposit is not the best place to keep your emergency fund. Even with a CD ladder, you could face early withdrawal penalties or other fees to access your cash in case of emergency. A better place for an emergency fund or other savings you need to access on short notice is a high-yield savings account.
How to Build a CD Ladder
There are a few ways to build a CD ladder, depending on your financial goals and how long you plan to invest your money.
A common CD ladder structure is based on annual CDs, which you can roll into 5-year CDs as each one reaches maturity. To start, open five CDs (with 1-year, 2-year, 3-year, 4-year, and 5-year terms). Once each annual CD matures, you’ll roll the balance into a higher-interest 5-year CD. This allows you to maintain annual liquidity while benefiting from the higher rates that long-term CDs offer. Here’s an example:
After your first 1-year CD comes to term, say 5-year CD rates have increased to 3%. If you rolled your new $508 balance into a 5-year CD with a 3% APY, you’d have about $580 at the end of the term. In other words, you’ll have earned a total $80 in interest over six years — alongside the earnings you’ll also get from each of the four subsequent CDs in your ladder. If rates continue to rise, you’ll earn more as you continue to roll your balances from those initial CDs into new CDs at the end of their terms.
Short-Term CD Ladders for a Rising Rate Environment
Given today’s increasing federal interest rates, though, long-term certificate of deposit investing may not be the best way to maximize your earnings.
With rates rising quickly, a shorter CD term can help you avoid missing out on potentially higher APYs, says Cory Moore, founder of Moore Financial Planning in Oklahoma City, Oklahoma. Moore says he doesn’t typically recommend CD ladders longer than 18 months to two years. “If rates continue to go up, then maybe you can continue to build that ladder.”
Here are a few examples of shorter-term CD ladders that experts say can help you maximize rates today:
Quarterly CD ladders
If you want more liquidity than a standard 5-year CD ladder, some experts recommend a quarterly ladder strategy, starting with four accounts: a 3-month, 6-month, 9-month, and 1-year CD.
“Once you have this strategy going, every quarter you have a new CD maturing, so it creates at least a 90-day period of liquidity,” says Ayesha Selden, a certified financial planner and franchise owner of Ameriprise Financial Services Inc in Philadelphia. Here’s how it can work:
|CD Term||Amount||APY||Return||Balance at Maturity|
Like the first ladder strategy above, you can roll each CD into a longer-term option when it reaches maturity. That way, you’ll maintain the quarterly liquidity but benefit from higher rates.
For example, when the 3-month CD matures, you can roll that balance into a new 1-year CD. Then, as the 6-month, 9-month, and 12-month CDs mature, you can invest each one into new 1-year CDs, too, and they’ll continue to mature on a quarterly basis until you stop rolling the CDs over.
“You still have access to them every three months … but you are taking advantage of that 12-month interest rate, which is going to be higher than the 3-month, 6-month, or 9-month interest rates,” says Nia Gillett, a paraplanner for Gen Y Planning, a financial planning firm.
Annual CD Ladders Every Quarter
You might also choose an inverse strategy: Instead of opening certificates of deposit with different terms at the same time, you can keep your money liquid and benefit from rising rates by opening CDs with the same term at different intervals.
For example, say you open a 12-month CD each quarter over the course of a year, for a total of four CDs:
|CD Term||Amount||APY||Return||Balance at Maturity|
In this example, each CD would mature on a quarterly basis, starting a year after you open the first CD. They’re the same 1-year term, but because you open them in a rising rate environment, the APYs increase each quarter.
With this CD ladder strategy, keep in mind that you won’t have access to your funds from the CD ladder until after the first year. That makes it even more important to use this approach when rates will continue to rise — if rates started to fall while you build your ladder this way, you’ll risk being left with lower rates in the future.
Monthly CD Ladders
If you want to have more liquidity on your ladder than even quarterly CDs offer, 1-month CDs are another option. A monthly ladder strategy would work the same way as the previous example — open 1-month CDs over a period of several months, so you maintain monthly liquidity.
This is a less appealing option, though, since 1-month CDs carry very low APYs. Plus, you’ll need to be even more proactive in rolling over your CDs and keeping up with your interest rates and balances.
Instead, a better alternative if you’re looking to maximize flexibility is a high-yield savings account — variable APYs on these accounts now range between 1.00% and 2.00%. Just like CD rates, it’s best to compare rates and account options to find the best high-yield savings account for you.
Given today’s high inflation rate, some experts recommend a Series I Savings Bond ladder. This strategy works by staggering bonds every six months to take advantage of I Bond rates. But you should take into account that you won’t have liquidity for the first year of each bond you open. Plus, I Bond interest rates are variable, so they may not be as competitive in the future as they are today.
Before starting your CD ladder, always make sure the bank you choose is FDIC-insured and has favorable terms that align with your goals. Some CDs require fees and minimum deposits, while others don’t. For more liquidity, you may also consider a no-penalty CD or other low-risk savings options.
As rates continue to rise, consider whether a shorter-term CD ladder with more liquidity can work with your financial goals.
Experts favor these shorter-term CD ladders in today’s rising rate environment, but you should be realistic about how much time and effort you’re willing to put into maintaining a CD ladder strategy compared to the benefit you’ll get out of it. Depending on your goal, a high-yield savings account with a variable rate, an inflation-tied Series I Bond, or an index fund with long-term potential returns may be better options.
Most importantly, pay attention to rate changes to make the most of your CD ladder return and to know when to stop contributing if rates drop.