CDs are federally insured, just like you’re checking and savings accounts, but they usually come with much better interest rates. In 2023, some CD rates hit 6% or more. The catch? Unlike other bank accounts, CDs require you to lock up your money for a set period, which can range from a month to five years or more.

That’s where a CD ladder comes in handy. This strategy involves splitting your savings into several CDs that mature at different times. This way, you can earn the most interest possible while still having access to some of your money.

The ladder is a very simple tool that gives you the maximum amount of flexibility.

How to Find the Best CD Ladder Rates

CDs usually pay higher interest rates than checking and savings accounts because they require you to lock up your money for a specific period. For example, in October, the average savings account paid 0.46%, while average CD rates ranged from 0.22% to 1.50%. Online banks and credit unions often offer even better rates.

Rates vary based on the length of the CD and how much you deposit. Typically, the more money you’re able to invest and the longer the term, the better the rate you’re going to get.

While some big national banks have started offering competitive CD rates, it’s also worth checking out online banks, local community banks, and credit unions. CDs are available in various terms, from a few months to five years or more. Some institutions even offer CDs with terms as short as 30 days, but those usually don’t have great returns.

Banks often have promotional CD rates, too. These rates might look appealing but aren’t always ideal for laddering because they often come in odd terms, like 11 months instead of a full year.

How to Set Up a CD Ladder

A CD ladder is a savings strategy that offers the higher yield of a CD with the flexibility of a savings account.

You create a CD ladder by dividing the amount you want to save into smaller portions and putting those into individual CDs with staggered maturity dates. When a CD matures, you roll those funds into a new CD, potentially at a higher interest rate.

Here’s a simple example: Let’s say you have $15,000 to invest in CDs. Instead of putting it all into one CD, you could create a ladder with three different CDs:

• $5,000 in a 3-month CD
• $5,000 in a 6-month CD
• $5,000 in a 1-year CD

When the 3-month CD matures, you roll it into a 6-month CD. This way, at any point, you’ll have access to $5,000 every three months, giving you a nice balance of earning interest and keeping your money accessible.

How Much Money Do You Need for a CD Ladder?

While some banks have minimum deposits of $1,000 or more for CDs, many set the bar lower, or have no minimum at all. This means you can build a CD ladder even with a modest amount of money. If you aim for a five-year ladder and use CDs with a $500 minimum deposit, you could start with as little as $2,500.

How Long Should a CD Ladder Be?

A three-year or a five-year ladder are oftentimes best, because longer-duration CDs generally offer higher returns than shorter-term ones. If you think you’ll need the funds in less than three years, a high-yield savings account might be a better option, offering similar interest rates without the limitations of a CD.

Most CDs have penalties if you withdraw funds before maturity, ranging from 30 days to a full year’s worth of interest, depending on the term. If you don’t want to risk it, look for a no-penalty CD, but note that they usually have lower interest rates than traditional CDs.

What Are the Benefits of CD Laddering?

The main benefit of laddering is that you always have access to some portion of your savings within a relatively short time frame. While not a substitute for an emergency fund, a CD ladder can effectively augment one. If the first CD in your ladder matures in three months, you can keep enough money in a regular savings account to cover expenses during those three months and invest the rest in a ladder of CDs with higher interest rates.

In a rising interest rate environment, laddering CDs helps you capture potential rate increases. If you had locked $10,000 into a three-year CD in 2021 or 2020, you’d probably regret it now. But if you split that total into $2,000 blocks with staggered maturity dates, you would have the chance to reinvest part of your savings at higher rates as the Fed raises interest rates to combat inflation.

Laddering also allows you to benefit from the higher yields offered by longer-term CDs. Once you have a ladder with regular maturity dates, each new CD you buy will have a term corresponding to the farthest date of your ladder, letting you earn extra interest while keeping some of your money accessible.

How Many CDs Can You Have at One Bank?

There’s no limit to how many CD accounts you can have at one bank, but FDIC insurance typically covers only up to $250,000 in deposits at a single institution. If you plan to have more than that in CDs, spread your accounts across several banks to ensure your funds are fully protected.

What Are Some Alternatives to a CD Ladder Strategy?

Experts suggest that you can use the laddering technique for other types of financial products as well. Any low-risk, fixed-income instrument works well in a ladder. It could be a CD, a Treasury, an investment-grade corporate, or municipal bond.

Short-Term Treasurys

Like CDs, short-term Treasurys are sensitive to Fed rate changes and offer marginally more favorable tax treatment. Earnings are taxed federally at ordinary income rates, but interest on deposit accounts (including CDs) and corporate bond yields are also taxed at the state and local levels.

No-Penalty CDs

One of the biggest drawbacks of CDs is the penalty for early withdrawal. Some banks offer non-penalty CDs, but these typically have lower rates of return.

Brokered CDs

Brokered CDs, bought through brokerage accounts, offer higher returns than conventional CDs without risking your principal. They allow you to hold CDs with multiple banks and credit unions at once, helping to ensure FDIC insurance coverage (since the limit is $250,000 per institution).

Brokered CDs can also be sold before maturity without early withdrawal penalties, but they are callable, meaning the bank can terminate the CD at any time.

Savings Accounts

If you prefer not to lock away your money or don’t want to manage CD rollover dates, consider high-yield savings accounts. While CDs offer higher APYs, many online and some traditional banks offer savings accounts with returns of 4% or higher.

For those with the time and funds, a CD ladder is a risk-free strategy that can earn higher returns over time. The nice part about laddering CDs is you’re getting a higher rate for your savings, but you’re still able to maintain that liquidity.

There’s no magic number involved—it’s all about timing

So, you’ve got some extra cash on hand. Now you need to decide whether to save it or invest it. Surprisingly, this decision isn’t about how much money you have. Nowadays, with apps offering no transaction fees and low ongoing costs, you don’t need a large sum to start investing.

The key factor is time, not money. Here’s the simple rule: if you need the money within the next three years, save it in a high-yield savings account or a CD. If your goal is more long-term, or you don’t have a specific need for the money, consider investing in something that can grow, like stocks or bonds.

Time matters because it relates to risk. Money in a savings account is safe—you keep your balance, earn interest, and your funds are FDIC insured if the bank fails. Plus, you can access your money anytime without worrying about losses.

Right now, interest rates on high-yield savings accounts, especially from online banks, are pretty good—around 5 to 6% at some places. (These rates will eventually drop, but high-yield accounts will almost always be better than traditional ones.) CDs and money market accounts also have high rates right now, even beating inflation.

Investing could earn you more, but there are no guarantees. For example, the S&P 500 had over 20% returns in 2023 but lost 19% in 2022.

So, how do you choose the best option for your money and goals? There are tons of accounts and financial products out there. We’ve researched options from financial experts on each one and when they’re best to use. Read on to find out more.

Save Money You Need This Month

Your strategy: Saving
The tool you need: Checking account

Option: Put money for your day-to-day spending and bill payments here. This should cover your monthly spending, but not much more. However, avoid cutting it too close to avoid overdraft fees. Even though many banks have reduced these fees, penalties can still occur. Track your budget with a DIY method or a budgeting app and aim to keep at least 25% more than your monthly needs in your account to cover your checks.

Save for Emergencies and Unexpected Costs

Your strategy: Saving
The tool you need: High-yield savings account

Option: Use a savings account for your emergency fund and unexpected costs. These accounts should be liquid so you can easily cover deductibles, unexpected repairs, market downturns, or avoid debt.

Most financial experts suggest having at least three to six months of expenses saved for emergencies, like job loss. To be extra cautious, aim for 12 months given the current economic climate. If your income is unpredictable or you’re nearing retirement, you might want to save even more. Early retirees often keep up to two years of cash handy to avoid market risks. I learned this firsthand, and it really helped.

If retirement is far off, keep a minimum in your savings and invest the rest for long-term growth. Automating your savings is a smart move. Set up part of your paycheck to go directly into a savings account or arrange automatic transfers from your checking account. Money you don’t see is money you don’t spend. Keeping your high-yield savings account at a different bank from your checking can also help separate your savings from your spending.

CDs and Money Market Accounts

Your strategy: Saving
The tool you need: CDs, money market accounts

Option: For goals like buying a house in a couple of years, a CD can be a good choice. CDs lock in your money for a set period, offering a guaranteed rate of return, usually higher than a traditional savings account. You can open a CD online with most banks or investment brokerages. If you’re concerned about accessing your money, consider a CD ladder, which staggers your investments to ensure you have funds maturing regularly.

Money market accounts are another option, offering high interest without locking in your cash. These can be great for transitioning from saving to investing.

Invest for Long-Term Goals

Your strategy: Investing
Tools you need: Brokerage account or robo-advisor

Option: For long-term goals like funding your child’s college education, investing is a good strategy. Start by assessing your risk tolerance. Would you prefer having 100% in cash and seeing the market rise, or 100% in the market and seeing it fall by 29%? Your risk tolerance helps you decide on a portfolio mix, like 60% stocks and 40% bonds.

For young investors, a long-time horizon means short-term fluctuations are less relevant, so investing heavily in stocks might make sense. Most investing, like saving, can be done with a few clicks online. You can buy popular ETFs like VTI (Vanguard Total Stock Market Index Fund ETF) easily. If you’re hesitant about investing on your own, consider robo-advisors or professional advisors, which can offer tailored investment advice based on your financial situation.

Remember to diversify your investments to protect against downturns, spreading your money across different asset classes and sectors.

Invest for Retirement

Your strategy: Investing
The tools you need: 401(k), 403(b), IRA

Option: If you’re working, make sure you’re using an account like a 401(k) or 403(b) to save for retirement. Aim to max out your 401(k) or other workplace plan and at least contribute enough to get your company match.

Consider setting up automatic annual increases for your contributions, usually by 1%. Anything you don’t have to think about will help you save. If your employer matches 4%, save at least 5%—that’s just a day’s lunch money. Over time, you won’t even notice the difference. After a year, think about increasing your savings by 2% or even 3% each year.

If your company doesn’t offer a plan and you have earned income, you can start your own IRA or Roth IRA with an investment firm and contribute up to the yearly IRS limit. There are also options for self-employed retirement accounts with higher limits.

Should You Seek Professional Advice?

While you can go it alone with the advice above, sometimes getting personalized guidance from a professional can be smart. Experts suggest seeking a pro’s help during major life changes (marriage, having a child, etc.), if you want a solid retirement plan, or if you need reassurance that you’re on the right track.

If the stock market is volatile and you’re thinking about making big changes to your investments, a pro can offer valuable advice. A seasoned professional might tell you it’s a great time to maintain and even add to your portfolio to take advantage of lower stock prices. In the end, make the best financial decisions for your situation.