How To Build A CD Ladder

Certificate of deposit (CD) laddering can be a great way to grow your money and hit your financial goals. With a CD ladder strategy, you benefit from higher interest rates while still having access to your money at scheduled intervals. It’s a safe and reliable option for growing your savings without the risks and drawbacks associated with other types of investments. 

In this article, we’ll explain what a CD ladder is and how to build a CD ladder that fits your current financial situation while helping you work toward your goals.

Ready to grow your savings with CD laddering? Stop by your local Arkansas Federal Credit Union branch or view our CD rates online to get started.

What Is a Certificate of Deposit?

A CD is an effective way to grow savings because it offers reliable returns with minimal risk. When you open a certificate of deposit, you make a single deposit that earns a fixed interest rate for a specified period. 

It’s similar to a savings account, except that with a CD, you can’t add more money once you’ve made the deposit, and you need to keep your money in the account until the term ends. 

At Arkansas Federal, we offer share certificates, which function similarly to CDs but are offered by credit unions and are insured by the National Credit Union Administration (NCUA). You can build a CD ladder with share certificates and get all of the benefits of being a credit union member while growing your money.

How Does CD Laddering Work?

CD laddering is an investment strategy that allows you to take advantage of higher CD rates while still maintaining access to part of your savings over time. Here’s how it works:

Rather than putting all your savings into one CD that ties up all of your money at one time, a CD ladder spreads your deposits across multiple CDs with different end dates. For instance, you might open a 1-year, 2-year, and 3-year CD. When the shortest-term CD matures, you can choose to reinvest or access that cash while the other CDs continue to grow.

By laddering CDs, you get access to part of your savings, and you earn higher returns than you would with a regular savings account. It’s a simple, low-risk strategy to keep your money growing without it being completely out of reach.

How To Build a CD Ladder 

Now that you know what a certificate of deposit ladder is, let’s walk through how to ladder certificates of deposit so they fit your financial situation and goals.

Determine Length of Time for Ladder

Start by deciding how long you want your ladder to last. 

• 6-Month Ladder: Best if you want regular access to your money. You’ll have CDs maturing more often, but this typically means you get lower returns.
• 18-Month Ladder: A good middle ground. You’ll still have access to part of your funds every 18 months, while also locking in a guaranteed, usually higher, return.
• 5-Year Ladder: Ideal if you don’t need to touch your savings for a while and want to maximize returns. Longer CD ladders typically offer the greatest returns and longer-term protection from downward rate risk, but the trade-off is that your money is tied up for longer.

Think about how often you’ll need access to your funds and what kind of return you’d like to help you decide which ladder length makes the most sense for you.

Decide How Much to Invest

Next, figure out how much money you want to invest across your entire CD ladder. This is the total amount of money you will invest across your CD ladder. 

With CDs, you want to avoid using money that you might need, since early withdrawals typically come with penalties. We recommend picking a value you are comfortable not having access to until the final maturity date.

Allocate Your Total Investment Across CDs

Once you’ve decided on the total amount you are investing, allocate it into CDs with different maturity dates. For example, if you’re building a 5-year ladder with $10,000, you might put $2,000 into five different CDs. 

Your allocations do not have to be even. Depending on your financial goals and situation, you can invest more in longer-term CDs to lock in higher returns, or keep more in shorter-term CDs if you want more access. To get a better sense of what different investment amounts and durations might look like, you can use our free CD calculator to calculate your expected return.

As you divide your investment across CDs, remember that each one may have a minimum opening balance. At Arkansas Federal, you can start a CD with as little as $1,000, making it easy to get started building your CD ladder.

Reinvest as CDs Mature

As each CD reaches maturity, you’ll need to decide if you want to withdraw the money for use or reinvest it into a new long-term CD. Reinvesting allows your ladder to keep going while potentially locking in better rates. Over time, this rolling cycle keeps part of your money available at regular intervals, while the rest continues to grow.

Everyone’s situation is different, so how to ladder CDs will depend on how long you want to invest, how often you’d like to access your money, and the returns you’re looking for

CD Ladder Example

To better understand how CD laddering works, let’s walk through a CD ladder example. 

Let’s say you have $10,000 to invest and want to build a 5-year CD ladder. In this scenario, we’ll split the funds evenly across five CDs. This would mean your investments would look like this: 

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

Once you’ve invested your funds into the CDs, you wait for each of their maturity dates. At that time, you can choose to withdraw the money or reinvest it to keep your ladder going. In this example, we will reinvest the money into a new 5-year CD at maturity. The schedule would be:

• Year 0 (Initial Investment): Allocate $10,000 across five CDs 
• Year 1: The 1-year CD matures, and it is reinvested into a new 5-year CD.
• Year 2: The 2-year CD matures, and it is reinvested into a new 5-year CD.
• Year 3: The 3-year CD matures, and it is reinvested into a new 5-year CD.
• Year 4: The 4-year CD matures, and it is reinvested into a new 5-year CD.
• Year 5: The 5-year CD matures, and it is reinvested into a new 5-year CD.
• Year 6 and beyond: A 5-year CD will mature every year

By doing this, after year 5, you’ll always have one 5-year CD maturing every year. This provides you with steady access to part of your money while the rest continues to earn the higher returns of long-term CDs.

Additional Ladder Structures

Although the traditional ladder is the most common CD laddering approach, there’s no “right” way to structure your CDs. The best ladder depends on your financial situation and savings goals. Here are three alternative laddering structures that may work for you:

• Mini Ladder: Exclusively uses short-term CDs, like 3, 6, 9, and 12 months. This is best for people who want regular access to their money while still earning more than a regular savings account.
• Barbell Ladder: Splits money between very short-term and long-term CDs. For example, half in 6-month CDs and half in 5-year CDs. This is best for people who want some flexibility in the near term while also locking in higher long-term rates.
• Bullet Ladder: Times all CDs to mature at once. For example, opening 1-, 2-, 3-, 4-, and 5-year CDs so they all come due in Year 5. This is best for people who are planning a large future expense that they are saving toward.

Build A Share Certificate Ladder With Arkansas Federal Today

At Arkansas Federal, share certificates are available for personal, IRA, and business accounts and can be used to build CD ladders. There are no limits to how many share certificates you can have, so you can build the CD laddering strategy that works best for you. 

Arkansas Federal offers some of the best CD rates on the market with our share certificates, with options ranging from 3 months to 7 years or more. Our certificates don’t have service fees and require a low minimum deposit of $1,000, making it easy to get started. 

Stop by your local Arkansas Federal branch or view our certificate rates online to open an account today.