Here's How I'd Construct a CD Ladder With $10,000 Right Now

Certificates of deposit, or CDs, offer a guaranteed yield for a certain period of time, but the downside is that the longer your yield is guaranteed, the longer you'll have to keep your money tied up.

A CD ladder can be a great way to get both high guaranteed yields and financial flexibility, but there's not one perfect way to do it. With that in mind, here's how a CD ladder works, some of the things I would consider if I were building a CD ladder from scratch today, and how I'd allocate a $10,000 sum to maximize income and flexibility.

What is a CD ladder?

The basic concept of a CD ladder is a pretty simple one. Instead of putting all of your money in one CD, you divide it into equal amounts and open several CDs with staggered maturities. For example, instead of putting $10,000 into a 5-year CD, you might put $2,000 in a 1-year CD, $2,000 in a 2-year CD, and so on, up to five years.

The idea is that by doing so, you're giving yourself a combination of the financial flexibility that comes with short-term CDs and the longer guaranteed yields of longer-term CDs. And you'll have one CD that matures every year, and you'd simply roll that money into a new long-term CD.

Of course, there's not one perfect way to construct a CD ladder. You can divide your money into five equal baskets and use CDs with 1-year to 5-year maturity terms. You can use three or four equal CDs if you'd prefer. Or, you can do a shorter-term CD ladder with maturities of six months, one year, 18 months, and two years, just to name another possibility. The point is that a CD ladder can be highly customizable to meet your specific financial needs.

Here's what I would look for

If I were to start a CD ladder today, there are a few must-haves that I would look for, as well as some nice-to-have features.

The most obvious essential is a bank that offers all of the CD terms that I need. While most banks on our top CDs list have the standard 1-, 2-, 3-, 4-, and 5-year CDs, not all of them do.

One other essential (and this is just my preference) is to find a bank that allows CD customers to withdraw their interest at any time, without penalty. In other words, if I have a $10,000 CD at 5.00% interest, I could withdraw the $500 I get paid during the first year and leave the initial $10,000. Not all banks offer this, but it isn't difficult to find.

Here's why I would insist on this. One of the main points of using a CD ladder is for increased financial flexibility. If my bank allowed penalty-free withdrawals of interest, not only would I have access to some of my money every year as a CD matures, but I'd also be able to access the interest in my accounts whenever I needed. To be clear, I would fully intend on leaving the money alone to grow and compound, but all things being equal, added flexibility is nice.

Finally, while it isn't an absolute necessity, I'd prefer a bank with a user-friendly app and with easy ways to deposit and transfer money. For example, a bank where I could also maintain a savings account to move money in and out of CDs as I open and close them over time would be convenient.

How I'd construct a $10,000 CD ladder right now

With all of the above in mind, I'd first create a short list of banks that meet my needs. Our list of the best CDs is a good place to start your search and that's exactly where I would begin. But you'll find as you go through that even some of the best banks might not check all of the boxes. For example, Ally High Yield CDs are generally excellent, but don't come in 2-year or 4-year terms.

On the other hand, one that looks like a top CD ladder candidate is Barclays Online CDs. They come in every term I would need to create a 5-year CD ladder, which is what I'd want to do. Barclays allows customers to withdraw CD interest each month, or leave it in the CD. And to make it a little more convenient, there's the Barclays Online Savings account, which has a high APY and can seamlessly link to the CDs.

There are other excellent candidates as well. For example, Synchrony Online CDs come in a variety of term lengths and allow the penalty-free withdrawal of interest. You can use a Synchrony Bank High Yield Savings account to facilitate easy transfers to and from the CDs.

I'd most likely use one of these top banks to create a CD ladder today. And if I had $10,000 to set aside, I'd divide it into five baskets of $2,000 and open 1-year through 5-year CDs with each of them. But the bottom line is that there are several different ways to go, and none of them are necessarily wrong. It's a matter of what your financial goals are and how much financial flexibility you're looking for.