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

A CD Ladder can earn money at higher interest rates than standard savings accounts and still maintain access to funds. Certificates of Deposit are guaranteed investments and will not lose money and are good for short term investing. Learn how to start saving with CD Ladder.
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Many people prefer to keep a certain amount of cash in their investment portfolio, especially when investing for 5 years or less.

However, savings accounts do not always give the best return on investment for cash.

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 don’t lose the money you’ve added – you can miss out on interest rate increases if you save your money in CDs for a long period.

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.

The only problem with CDs is liquidity – you must leave the money in the CD until it matures or face an early withdrawal penalty.

However, there are options to increase your access to your money without sacrificing access to higher interest rates as they come along.

How to Build a CD Ladder

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

  • $5,000 invested in a one-year CD
  • $5,000 invested in a two-year CD
  • $5,000 invested in a three-year CD
  • $5,000 invested in a four-year CD
  • $5,000 invested in a five-year CD

After your first year, the first rung of your ladder matures, and each of your other CDs takes a step down the ladder. The two-year CD now has one more year to maturity, the five-year CD now has four years left to maturity, etc.

It will look something like this:

CD #1CD #2CD #3CD #4CD #5
Year 11-Year2-Year3-Year4-Year5-Year
Year 22-Year3-Year4-Year5-Year5-Year
Year 33-Year4-Year5-Year5-Year5-Year
Year 44-Year5-Year5-Year5-Year5-Year
Year 55-Year5-Year5-Year5-Year5-Year
Sample 5-year CD Ladder

In this example, one-fifth of the total investment in a 5-year CD ladder is available yearly.

This allows the investor to roll the CD over or use the money if needed. It also helps smooth the investor’s return on investment over a long period. If the rates are good (as they are now) it allows the investor to lock in favorable returns for a set amount of time, which savings accounts do not allow.

CD ladders do not have to be built on a 5-year pattern. Some people use CDs for their emergency funds and base it on a 12-month rolling schedule.

This way, they know they will never be more than a few weeks away from access to at least some of their money.

The money from your one-year CD that just matured can be reinvested into the open rung of your ladder, which in this example is your five-year rung, by purchasing a new five-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. Each year, you have access to money and can make investment decisions based on the market and your unique financial needs.

If interest rates increase, each time your CDs 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 when 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 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.

Using CDs for Short-Term Investing

CDs and savings accounts are guaranteed investments. As long as the FDIC backs your bank, 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 of 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), I 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 five-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 break the CD, you only pay a couple of months’ interest, which isn’t a big deal. It certainly isn’t as bad as losing a large portion of your principal, 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 key 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 needed, and you 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 investments, provided you have a long enough time frame.

For example, on average, stocks 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 to invest 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 Build a CD Ladder

Using a CD Ladder is a great way to earn more money than you can in a savings account but still maintain access to your money at short intervals.

Most banks offer CDs, but not all banks are created equal. Many online banks offer much higher interest rates than brick-and-mortar banks. It pays to shop around.

We maintain a list of high interest CD rates on our website. Always shop around for the best interest rates and 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, Military.com, 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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