What a CD ladder is
A certificate of deposit pays a fixed rate for a fixed term, and the money is locked until the term ends. A ladder splits one deposit into several CDs with staggered terms: a 1-year CD, a 2-year CD, a 3-year CD, a 4-year CD and a 5-year CD. The 1-year rung matures first, then the 2-year, and so on, so some money frees up every year while the longer rungs earn the higher rates that long terms pay. It is the middle ground between a savings account, where all the money is free but the rate is low, and a single 5-year CD, where the rate is high but nothing is free for five years.
Step 1: Decide how much to ladder
Start with money you will not need for at least a year, and only money you can leave alone: breaking a CD early costs a penalty, usually several months of interest. A $10,000 deposit is a good example size, because it splits neatly into 5 rungs of $2,000, and most banks open a CD with $500 to $1,000, so $2,000 a rung clears the minimum at nearly every bank.
Step 2: Pick the number of rungs
Five rungs is the common choice, because it gives a maturity every year for five years and keeps the arithmetic simple: $10,000 across 5 rungs is $2,000 a rung. Fewer rungs mean bigger rungs and less interest — 3 rungs at $3,333.33 each earn $850.16, against $1,369.29 for 5 rungs, because less money sits in the long terms. More rungs mean more interest and more yearly maturities, but smaller rungs: 10 rungs at $1,000 each would need rates out to 10 years, which not every bank offers. Pick the number of rungs to match the years you want maturities for, and keep the rung amount above the bank’s minimum.
Step 3: Match rates to terms
Check the bank’s actual rates, because the rate is what sets the return: longer terms usually pay more, so the 1-year rung pays the least and the 5-year rung pays the most. In the example, the rates rise from 4.00% for one year to 4.10% for two, 4.20% for three, 4.30% for four and 4.50% for five.
Step 4: Split the deposit
Divide the deposit by the number of rungs: $10,000 divided by 5 is $2,000 a rung. Every rung gets the same amount, so every rung earns the same weight in the first year, and the first-year interest is the rung amount times the sum of the rates. Open one CD per rung, each with its own term and rate, and write down which rung matures when: the 1-year rung matures in year one, the 2-year rung in year two, and so on to the 5-year rung in year five. Equal rungs keep the ladder even: if the rungs were uneven, the yearly maturities would be uneven too.
Step 5: Work out each rung
Each rung compounds once a year at its own rate for its own term, so rung i matures at the rung amount times one plus its rate, raised to the power of i. At $2,000 a rung, that is $2,000 times 1.04, which is $2,080.00 for the 1-year rung; $2,000 times 1.041 squared, which is $2,167.36 for the 2-year rung; $2,000 times 1.042 cubed, which is $2,262.73 for the 3-year rung; $2,000 times 1.043 to the power of four, which is $2,366.83 for the 4-year rung; and $2,000 times 1.045 to the power of five, which is $2,492.36 for the 5-year rung. The rung interest is the maturity minus the $2,000: $80.00, $167.36, $262.73, $366.83 and $492.36.
Step 6: Add it up and compare
Add the rung maturities: $2,080.00 plus $2,167.36 plus $2,262.73 plus $2,366.83 plus $2,492.36 is $11,369.29, so the total interest is $1,369.29. The first-year interest is $2,000 times the sum of the rates — 4.00% plus 4.10% plus 4.20% plus 4.30% plus 4.50% is 21.10% — which is $422.00, and the average annual interest is $1,369.29 divided by 5, which is $273.86 a year. Compare that with the alternatives: putting all $10,000 in a single 5-year CD at 4.50% matures at $12,461.82 with $2,461.82 of interest, but nothing is free until year five; putting it all in a 1-year CD at 4.00% matures at $10,400.00 with $400.00 of interest, which is less than the ladder’s $422.00 in the first year alone. The ladder earns less than the single long CD and more than the single short one, and it frees $2,000 every year.
Worked example: $10,000 across 5 rungs
Step 2: 5 rungs, one maturing each year.
Step 3: rates 4.00%, 4.10%, 4.20%, 4.30%, 4.50%.
Step 4: rung amount = $10,000 ÷ 5 = $2,000.
Step 5: rung 1 = $2,000 × 1.04 = $2,080.00; rung 2 = $2,000 × 1.041² = $2,167.36; rung 3 = $2,000 × 1.042³ = $2,262.73; rung 4 = $2,000 × 1.043⁴ = $2,366.83; rung 5 = $2,000 × 1.045⁵ = $2,492.36.
Step 6: total maturity = $11,369.29; total interest = $1,369.29; first-year interest = $422.00; average annual interest = $273.86.
Step 7: when rung 1 matures, spend it or roll it into a new 5-year CD.
Answer: $11,369.29 at maturity, $1,369.29 of interest, $422.00 in the first year.
Step 7: Decide what happens at maturity
When the 1-year rung matures at $2,080.00, you have a choice: spend it, or roll it into a new 5-year CD. Rolling it keeps the ladder going: after five years, a rung matures every year and is replaced by a new 5-year rung, so the ladder never ends and every rung earns the 5-year rate. Spending it ends the ladder one rung at a time, which is the right choice when the money is for a planned expense. Either way, decide before the maturity date, because most banks renew a CD automatically at the current rate if you do nothing.
What changes the return most
The deposit moves the interest in proportion: a $25,000 deposit earns $3,423.22, which is two and a half times the $1,369.29 on $10,000. The rates move it more than the rungs do: a flat 5% earns $1,603.83, which is $234.54 more than the rising rates, because the short rungs earn 5% instead of 4.00% to 4.30%. The number of rungs moves it the other way: 3 rungs earn $850.16, which is $519.13 less than 5 rungs, because less money sits in the long terms. The rate is the lever to shop: compare banks by the 5-year rate first, then by the short rates.
Work backwards from a target
When the goal is a number, run the ladder in reverse: the deposit for a target interest is the target divided by the interest per dollar. At the default rates, the ladder earns $1,369.29 on $10,000, which is $0.136929 per dollar, so a deposit of $14,606.12 earns $2,000 of total interest. For the first year alone, the ladder earns $422.00 on $10,000, which is $0.0422 per dollar, so a deposit of $11,848.34 earns $500 in the first year. Start from the interest you want, not the deposit you have.
Frequently asked questions
How much money do I need to start a CD ladder?
Enough to clear the bank’s minimum on every rung. Most banks open a CD with $500 to $1,000, so a $10,000 deposit across 5 rungs is $2,000 a rung and clears the minimum easily. A $5,000 deposit is $1,000 a rung, which still works at most banks.
How much interest does a $10,000 CD ladder earn?
$1,369.29 over five years, at rates of 4.00%, 4.10%, 4.20%, 4.30% and 4.50%. The ladder matures at $11,369.29, with $422.00 of interest in the first year and an average of $273.86 a year.
What happens when a rung matures?
You choose: spend it, or roll it into a new 5-year CD. Rolling it keeps the ladder going with a maturity every year. Decide before the maturity date, because most banks renew a CD automatically at the current rate if you do nothing.
Is a CD ladder better than a savings account?
For the rate, yes: the ladder earns $422.00 in the first year on $10,000, against $400.00 from a single 1-year CD and less from a savings account at a lower rate. For access, no: the ladder locks most of the money for years, while a savings account frees it all at once.
Do I pay tax on CD ladder interest?
Yes. CD interest is taxed as ordinary income in the year it is earned, so the after-tax interest is lower than the $1,369.29 shown here. The calculator shows the pre-tax figures; check your tax bracket for the after-tax number.
Try it: run your own numbers through the free CD ladder calculator — deposit, rungs and rates, with every rung, the total interest and the first-year interest broken out.