A CD ladder is a savings strategy that leverages the stability and competitive returns of CDs (certificates of deposit) while providing added flexibility. This strategy may be a good choice for investors seeking the low risk and predicable returns of CDs while mitigating their limited liquidity.
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CD ladder: What it is and how to build one
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CDs
What is a CD ladder?
A CD ladder is like a series of stepping stones for your savings. This approach involves spreading your money across different CDs that mature at different times. The goal is to maintain flexibility while earning fixed interest.
CD laddering allows you to lock in a higher average coupon—the amount of fixed interest the CD will provide over its lifespan. Spreading your investment dollars across different maturities can also help you maintain a steady income stream.
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How does a CD ladder work?
Let's say you have $30,000 you don't need right away but may want to access over the coming years. You could purchase multiple CDs that will each mature at a different time. Here's how you might create your ladder:
| CD type | Inital deposit | Coupon | Estimated interest earned | Estimated total received at maturity |
|---|---|---|---|---|
1-year CD Pay at maturity |
$10,000 | 3.00% | $300 (3.00% of $10,000) | $10,300 |
2-year CD semiannual pay |
$10,000 | 3.50% | $700 (3.50% of $10,000 per year for 2 years) | $10,700 |
3-year CD Semiannual pay |
$10,000 | 4.00% | $1,200 (4.00% of $10,000 per year for 3 years) | $11,200 |
| Total interest earned over 3 years: $2,200 | Total amount at the end of 3 years: $32,200 |
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This example is for illustrative purposes only and is not a recommendation to buy or sell a particular security. It does not take into consideration your personal circumstances or other factors that may be important in making investment decisions
Like in the CD ladder example above, typically, the longer the CD term, the higher your coupon—but this isn't always the case.
By staggering your maturity dates, you ensure that your CDs mature at different times, giving you access to your money in smaller portions. This strategy helps you stay flexible while still benefiting from high interest rates.
Some CD ladder strategies involve reinvesting your funds at the end of their terms. In a 5-year CD ladder, this could mean that once your 1-year CD matures, you reinvest that money into a 5-year CD, and once your 2-year CD matures, you reinvest that money into another 5-year CD, and so on. With this method, you take on less risk from coupon rate fluctuations. You can also choose to keep portions of your money rather than reinvesting it. Keep in mind that some CDs offer automatic reinvestment, while others don't.
When you invest in CDs, your funds are locked in until the maturity date, unless you choose to sell early. If you sell your CDs early, you'll be subject to the pricing in the secondary market, which may be higher or lower than your purchase amount. This is an important consideration when deciding whether CD laddering is right for you.
Benefits of a CD ladder
Some reasons you might choose CD laddering:
- Guaranteed returns. CDs are one of the safest investments, offering a guaranteed rate of return. This makes them a good choice for risk-averse investors.
- Balanced risk and return. Staggering CD maturity dates helps you balance risk and return while withstanding market fluctuations. You can take advantage of the higher interest rates of longer-term CDs without locking in all your funds for a long period.
- Liquidity. A CD ladder keeps your money somewhat accessible by ensuring a portion of your investment matures regularly. This reduces the risk of needing to make an early withdrawal and incurring penalties.
- FDIC insurance. Your investments are FDIC insured up to $250,000 per beneficial owner, providing an added layer of security and peace of mind.
Some potential risks and drawbacks to keep in mind:
- Maturity date waits. With a CD, your money is not readily accessible until your maturity date. If you do withdraw, you may incur fees. While CD laddering can help mitigate this by staggering maturity dates, it’s important to consider whether you’ll need greater access to your money.
- Forgetting to make updates. Life gets busy—and sometimes details like CD maturity dates can slip the mind. You may forget to withdraw your funds or to reinvest and continue your ladder.
- Deposit minimums. Most CDs require you to deposit a minimum amount. This often ranges from $500 to $2,000. If you're starting with less cash, you may want to consider alternatives.
How to build a CD ladder?
1. Do your initial research.
Congrats—you're already on the first step! Keep the momentum going by getting to know different institutions and CD ladder strategies and searching for various CD rates, maturity dates, and minimums.
2. Determine how much money to invest in CDs.
This should be cash you don't need immediately and would like to see grow. Make sure you maintain enough liquid savings to cover any emergency expenses.
3. Choose your duration and how often you want your CDs to mature.
Whether building a 3-year ladder or a 10-year ladder, be purposeful and realistic with your selections. Consider when you may need cash flow and how much you want to diversify.
4. Create your ladder.
Log in to vanguard.com and choose brokered CDs from different institutions, seeking out the best interest rates, minimums, and maturity dates for you.
5. Withdraw money as your CDs mature.
You can choose to put the extra cash to use or reinvest in more CDs to continue your ladder's climb upward.
CD ladder strategies for different goals
As with all savings strategies, you should customize your CD ladder based on your individual goals. Don't invest more than you can afford to lock away, and always keep enough money aside for emergencies. Liquidity—the ability to access your funds quickly without penalty—is a crucial factor in any investment strategy. A well-structured CD ladder helps ensure you have the flexibility to meet unexpected expenses while still earning competitive returns.
Short-term CD ladder
A short-term CD ladder (or mini CD ladder) includes CDs maturing in 3 months to 2 years. It's ideal for short-term goals, such as saving for a down payment.
Benefits: Faster access to funds and lower interest rate risk.
Drawbacks: Potentially lower yields and reinvestment risk.
Long-term CD ladder
A long-term CD ladder includes CDs maturing in 3 years or more. It's usually better suited for long-term goals, like a child's education savings. Longer-term CDs often have higher yields, but not always.
Benefits: Potentially higher yields and stability.
Drawbacks: Less liquidity and more interest rate risk.
Alternatives to CD ladders
CD laddering is just one savings option, and it's not for everyone. A CD ladder might not be the best fit if you're a more aggressive investor with a higher risk tolerance, if you need quick and flexible access to cash, or if you prefer the ease of other solutions.
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CD ladder versus bond ladder
A bond is a debt security in which the issuer, usually a government or corporation, agrees to make periodic interest payments and repay the principal at the maturity date. Similar to CD laddering, bond laddering involves purchasing bonds with different maturity dates to create a steady income stream.
Bond benefits and drawbacks
Benefits:
- Often pay more interest than CDs.
Drawbacks:
- Not FDIC insured like CDs.
- May be more difficult to sell in the secondary market than CDs.
CD ladder versus high-yield savings account and savings account alternative
A high-yield savings account (HYSA) offers a higher interest rate than a traditional savings account. Like a CD ladder, an HYSA provides a way to earn more on your savings, but it offers more liquidity. This could be right for an investor facing more uncertainty who needs continuous access to their cash.
High-yield savings account benefits and drawbacks
Benefits:
- FDIC insured like CDs.
- Higher liquidity than CDs.
- Access to your funds without penalties.
- Ability to set recurring, automatic investments.
Drawbacks:
- Interest rates can fluctuate, making earnings less predictable than CDs.
- Rates are often tied to economic conditions.
Vanguard's HYSA alternative, the Cash Plus Account currently offers a -% APY.1 Eligible balances are protected by $1.25 million of FDIC insurance for individual or trust accounts, or $2.5 million for joint accounts.2 It's important to keep in mind that interest rates may change, meaning that earnings will be less predictable than for CDs. This is one strategic savings option for savers wanting competitive interest rates.
CD ladder versus money market fund
A money market fund is a type of mutual fund that invests in short-term, low-risk securities. MMFs provide a way to earn more on your savings or manage cash between other investments.
Money market fund benefits and drawbacks
Benefits:
- Higher liquidity than CDs.
- Competitive interest rates.
- Ability to set recurring, automatic investments.
Drawbacks:
- Interest rate can fluctuate, making earnings less predictable than CDs.
- Rates are often tied to market conditions.
Does Vanguard offer CD ladders?
While Vanguard Brokerage doesn't offer pre-built CD ladders, we do have many CD options that can become part of your own do-it-yourself CD ladder. Vanguard offers brokered CDs with maturity terms spanning from 1‒3 months to 10+ years. Compared with a bank CD, a brokered CD is distributed through brokerage firms and can be sold before maturity with fewer penalties.
Any investor interested in CD laddering should also consider the benefits of other strategies and accounts. Options like bond laddering, money market funds, high-yield savings accounts, and savings account alternatives offer more flexibility and sometimes higher interest rates than CD laddering.
CD laddering might be right for you if you're looking for a low-risk option with predictable returns. It's also a way to think long term and stay disciplined in your approach.
Researching your options is a great way to start planning because there's no one-size-fits-all approach. And wherever you land, being thoughtful with your savings means you're already on a smart path.
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All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
Bank deposit accounts and CDs are guaranteed (within limits) as to principal and interest by the Federal Deposit Insurance Corporation, which is an agency of the federal government.
All brokered CDs may fluctuate in value between purchase date and maturity date. CDs may be sold on the secondary market, which may be limited, prior to maturity subject to market conditions. Any CD sold prior to maturity may be subject to a substantial gain or loss. Vanguard Brokerage does not make a market in brokered CDs. For information regarding FDIC coverage eligibility, visit fdic.gov.
Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline.
The Vanguard Cash Plus Account is a brokerage account offered by Vanguard Brokerage Services, a division of Vanguard Marketing Corporation, member FINRA and SIPC. Under the Sweep Program, Eligible Balances swept to Program Banks are not securities: they are not covered by SIPC, but are eligible for FDIC insurance, subject to applicable limits. Money market funds held in the account are not guaranteed or insured by the FDIC, but are securities eligible for SIPC coverage. See the Vanguard Bank Sweep Products Terms of Use (PDF) and Program Bank list (PDF) for more information.
1APY is -% as of -. The Cash Plus bank sweep program annual percentage yield (APY) will vary and may change at any time.
2Bank Sweep program balances are held at one or more Program Banks, earn a variable rate of interest, and are not securities covered by SIPC. They are not cash balances held by Vanguard Brokerage Services (VBS), a division of Vanguard Marketing Corporation (VMC); VMC is not a bank. Balances are eligible for FDIC insurance subject to applicable limits. Bank Sweep deposits are covered by FDIC insurance up to $250,000 per insurable category of ownership at each Program Bank when aggregated with all other deposits held by you at such bank and in the same insurable category. VBS will aggregate and allocate Bank Sweep deposits to Program Banks across Vanguard Cash Plus and Vanguard Cash Deposit with identically registered accounts to offer maximum FDIC coverage up to $1.25 million for individual and trust accounts and $2.5 million for joint accounts when at least 5 Program Banks are utilized. VBS will aggregate and allocate Bank Sweep deposits for trust accounts at the account level and not at the beneficiary level. FDIC coverage may be decreased based on Program Bank limits and whether you've opted out of any Program Banks and is subject to applicable FDIC coverage limits. You are solely responsible for monitoring the aggregate amount that you have on deposit at each Program Bank in connection with FDIC limits, including through other accounts at VBS. See the Vanguard Bank Sweep Products Terms of Use (PDF) and list of participating Program Bank (PDF) for more information. For more information about FDIC insurance coverage, please visit fdic.gov.
Bank savings accounts offer different services and features than a Vanguard Cash Plus Account. For example, savings accounts often offer features like overdraft protection, ATM access, bill pay services and other conveniences that Cash Plus Accounts do not offer. Cash Plus Accounts allow you to hold certain securities that bank savings accounts cannot hold. In addition, Cash Plus Accounts are subject to fraud prevention restrictions such as holding periods and transaction limits, which may not apply to a bank savings account. There may be other differences between these products that you may want to consider before choosing which option is best for you.