While High-Yield Savings Accounts offer variable yields that fluctuate whenever the Federal Reserve adjusts the federal funds rate, Certificates of Deposit (CDs) guarantee a fixed rate for the duration of the term. A CD ladder provides the best of both worlds: fixed peak rates and regular liquidity.
How a CD Ladder Works
Instead of locking a large lump sum (e.g., $20,000) into a single 5-year CD where you face early withdrawal penalties, you divide the principal equally across multiple maturities:
- $5,000 into a 6-Month CD
- $5,000 into a 1-Year CD
- $5,000 into an 18-Month CD
- $5,000 into a 2-Year CD
Every six months, one CD matures. You can either deploy those funds for current cash needs or reinvest them into a new long-term CD at the highest current rate.
CD Ladder Maturity Schedule
| Tranche | Allocation | Maturity Timeline | Action Upon Maturity |
|---|---|---|---|
| Tranche A | $5,000 | Month 6 | Reinvest into new 2-Year CD |
| Tranche B | $5,000 | Month 12 | Reinvest into new 2-Year CD |
| Tranche C | $5,000 | Month 18 | Reinvest into new 2-Year CD |
| Tranche D | $5,000 | Month 24 | Reinvest into new 2-Year CD |
Compare CD yields against US government-backed alternatives in our guide on buying Treasury bills (T-bills) safely, which offer state-tax-exempt status.