How to Build a CD Ladder – a Good Choice for Short Term Investments

Investing in certificates of deposit is a good way for investors to minimize risks and keep a percentage of their income unaffected by changes in the stock market. While CDs offer financial security in that you aren’t going to lose the money you’ve added – you can miss out on interest rate increases if you…
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Investing in certificates of deposit is a good way for investors to minimize risks and keep a percentage of their income unaffected by changes in the stock market. While CDs offer financial security in that you aren’t going to lose the money you’ve added – you can miss out on interest rate increases if you save your money in CDs over a long period of time.

Using a CD ladder helps you beat the rate cycles and avoid missing out on interest rate increases. When you ladder CDs, you can obtain new CDs and take advantage of higher interest rates while still having access to your money.

How to Build a CD Ladder

You decide how many years you want to invest, and that becomes the length of your ladder. Each year you invest is like a “rung” on a ladder. Take the money you have to invest and divide it over the number of years you plan to invest – so if you have $25,000 and plan to invest over 5 years, you’ll invest $5,000 in 5 different CDs with increasing maturity dates. For example:

  • $5,000 invested in a 1-year CD
  • $5,000 invested in a 2-year CD
  • $5,000 invested in a 3-year CD
  • $5,000 invested in a 4-year CD
  • $5,000 invested in a 5-year CD

After your first year, the first rung of your ladder matures, and each of your other CDs take a step down on the ladder. The 2-year CD now has one more year to maturity, the 5-year CD now has four years left til maturity, etc.

The money from your 1-year CD that just matured can be re-invested into the open rung of your ladder, which in this example is your 5-year rung, by purchasing a new 5-year CD. If you need to use the money for something else, you can, which is why the CD ladder is more liquid than simply putting the full $25,000 into a single CD for a long period of time. Each year, you have access to money and can make investment decisions based on the market, and your own unique financial needs at that time.

If interest rates increase, each time your CD’s mature, you have the opportunity to re-invest in a new CD to take advantage of that higher rate. Because you’re always replacing the highest “rung” of your ladder (the CD with the longest maturity date), you’ll always be taking advantage of the highest interest rates available at the time you’re investing. Alternatively, if they decrease, you still have money invested in CDs with the previously higher interest rates, minimizing the amount of money you’re investing in lower interest certificates.

In addition to the benefit of taking advantage of interest rates with secure investments like certificates of deposits, by setting up multiple certificates that mature annually, you’ll always have access to some of your money in case something unexpected should occur. You don’t want to withdraw money from certificates of deposits before their maturity date because of the penalties and loss of earnings involved.

Using CDs for Short Term Investing

CDs and savings accounts are guaranteed investments. As long as your bank is backed by the FDIC, then your Certificate of Deposit (CD) or savings account is a guaranteed investment and will not lose money. If you are investing for the short term and have a good idea when you will need the money, then a CD is not a bad way to go.

If you need full liquidity (access to the money at any given time), then I would recommend a high yield savings account, even though they may earn less interest than a CD. Savings accounts will never lose money and you should have unlimited access to your money.

If you want to earn more interest than most savings accounts and anticipate only needing some of the money at any given time, then I would recommend building a CD ladder. CD ladders will give you access to your money on a regular schedule – either annually or monthly, depending on how you set up the CD ladders.

The example used above is a 5 year CD ladder, but you could just as easily build a 12 month CD ladder, ensuring you have access to your funds once a month instead of once a year. The other benefit of CD ladders is that if you have to break the CD, you only pay a couple months interest, which usually isn’t a big deal. It certainly isn’t as bad as losing a large portion of your principle as can happen in the stock markets, or having your money tied up in real estate.

Don’t Take on Too Much Risk if You Know When You Will Need the Money

Many people shake their heads at the idea of calling a CD an investment, since it is tied to a savings account and will, at best, keep pace with inflation. The hey is understanding your investment goals. CDs are good when you need liquidity at a known time. A Certificate of Deposit will give you access to your funds when you need them, and still earn more than putting your money into a savings account.

Stocks and Real Estate don’t make good short term investments. Certificates of Deposit are excellent short term investments, since they are guaranteed not to lose money. You can most likely make more money in other types of investments, provided you have a long enough time frame. For example, stocks on average return around 11% per year. However, those are not guaranteed returns and stocks can gain or lose much more than that in any given year. So it’s not generally recommended investing in equities for short term investments. Real estate can also be a good investment for the long haul. But real estate has a liquidity issue. You can’t always access the funds at will.

Where to Open CD Ladders

You can open a Certificate of Deposit at almost any bank, but you should start by looking at banks that offer the highest interest rates so you can earn the best return on your investment. Here are some of the best military banks, and some of the highest interest rates. Always be sure to shop around for the best interest rates, and for the banking institution that best meets your needs.

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About Ryan Guina

Ryan Guina is The Military Wallet's founder. He is a writer, small business owner, and entrepreneur. He served over six years on active duty in the USAF and is a current member of the Illinois Air National Guard.

Ryan started The Military Wallet in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about personal finance and investing at Cash Money Life.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free Personal Capital account here.

Featured In: Ryan's writing has been featured in the following publications: Forbes,, US News & World Report, Yahoo Finance, Reserve & National Guard Magazine (print and online editions), Military Influencer Magazine, Cash Money Life, The Military Guide, USAA, Go Banking Rates, and many other publications.

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