CD Ladders

Updated: Feb 24

CD’s can be a great place to put some of your savings. A CD stands for Certificate of Deposit, and essentially it is an agreement where you deposit your money with a bank for a set amount of time. The bank will pay you interest on these savings well above average savings account rates. These are FDIC insured just like a regular savings account. There are many other more complex types of CD's (liquid, bump-up, zero coupon, etc.) but for the purpose of this article we will just focus on traditional CD's.

Time Frame

The longer the timeframe on the CD, the higher the rate of return. This is because if your money is going to be tied up for a longer amount of time, investors need to be compensated for this with a higher interest rate. It is worth mentioning that there is often a penalty for withdrawing deposits before the term on your CD expires. The penalty fee’s vary by provider, however usually it is a significant portion of the interest you’ve earned.


Choosing which CD is right for you depends on your liquidity needs. If you need to remain mostly liquid, you’re going to want to look at shorter term CD’s. If you don’t have any concerns over liquidity, you can opt for longer term CD’s. You can of course choose to split your money up amongst multiple term CD’s to achieve the best of both worlds.


This is called a CD ladder, and an example is below:

Lets say you have $10,000 of savings to invest in CD’s. You do some research and discover the various CD’s offered by your bank:

1 year - 1.5% APR

3 year - 1.75% APR

5 year - 2.25% APR

Return vs. Liquidity

Let’s assume that you need most of your money fairly liquid, so we will allocate more to the shorter term CD’s and less to the longer term CD’s. A hypothetical example could look like this:

1 year - 1.5% APR - $3,000

3 year - 1.75% APR - $5,000

5 year - 2.25% APR - $2,000

With this allocation, 30% of your savings will be accessible after year one, another 50% after year three, and the final 20% after year five. Your returns would resemble the below:

The example above suits an individual that requires more liquidity. Below is an example of what your ladder would look like if you are comfortable sacrificing a bit more liquidity and depositing more in longer term CD's:

1 year - 1.5% APR - $2,000

3 year - 1.75% APR - $3,000

5 year - 2.25% APR - $5,000

The return in the second example is significantly better, however this allocation is dramatically less liquid than the first example.

As you can see, CD ladders are an excellent way to maximize your risk-free return by sacrificing some liquidity. You really have a lot of flexibility to structure your ladder as you like to suit your liquidity preferences and increase your return.

Types of Savings Suitable for CD's

I wouldn’t recommend this strategy with your emergency savings fund (as this should be entirely liquid and readily available), however if you have any other savings that you don’t need accessible anytime soon (college fund, down payment fund, etc.) this can be an excellent strategy.


There are many different banks that offer CD's, as of right now rates are ranging anywhere from 1.75-2.5% for 1-5 year CD's. This isn't great (historically speaking), but it definitely is better than nothing. It should be a goal for all of us to at least be earning something on our savings, as the interest rates offered for traditional savings accounts just aren't satisfactory.

Check with your current bank to explore their options first. Other great resources that provide information on current CD offerings are:

Some banks even offer CD terms as short as a few months, one way to maximize your return is by re-allocating your funds from the longer term CD’s (when the term expires) into short term CD’s. This way you maximize liquidity and return.


Overall, CD ladders are an excellent option to consider to really get the most out of your savings. You have a lot of flexibility to structure your ladder to suit your needs, and if you reinvest your shorter term CD’s as they expire you can increase your returns even more while remaining fairly liquid. Definitely consider these when looking for risk free ways to maximize your return on your savings.

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