Here's What Happens When You Don't Ladder Your CDs

Since CD rates are so competitive right now, many people are rushing to open CDs so they can lock in great APYs before interest rates start falling. And you may be eager to do the same.

But before you throw all of your money into a single CD, you may want to consider setting up a CD ladder instead. Doing so could benefit you financially in a big way.

The upside of laddering your CDs

Let's say you have $10,000 to put into CDs. You could open a single CD with that $10,000 and call it a day. But laddering could be a much better approach.

Here's how a $10,000 CD ladder could work. You might take your first $2,500 and use it to open a 3-month CD. (These aren't always easy to find, but some banks offer them.) You can then take your next $2,500 and open a 6-month CD. 

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SoFi Checking and Savings APY up to 4.60% Rate info You can earn the maximum APY by having Direct Deposit (no minimum amount required) or by making $5,000 or more in Qualifying Deposits every 30 days. See SoFi Checking and Savings rate sheet at: https://www.sofi.com/legal/banking-rate-sheet. Min. to earn $0 Open Account for SoFi Checking and Savings Member FDIC.	APY up to 4.60% Rate info You can earn the maximum APY by having Direct Deposit (no minimum amount required) or by making $5,000 or more in Qualifying Deposits every 30 days. See SoFi Checking and Savings rate sheet at: https://www.sofi.com/legal/banking-rate-sheet.	Min. to earn $0
Synchrony Bank High Yield Savings APY 4.75% Rate info Our Disclosure: Annual Percentage Yields (APY) is subject to change at any time without notice. Offer applies to personal accounts only. Fees may reduce earnings. For High Yield Savings accounts, the rate may change after the account is opened. Visit synchronybank.com for current rates, terms and account requirements. Member FDIC Min. to earn $0 Open Account for Synchrony Bank High Yield Savings Member FDIC.	APY 4.75% Rate info Our Disclosure: Annual Percentage Yields (APY) is subject to change at any time without notice. Offer applies to personal accounts only. Fees may reduce earnings. For High Yield Savings accounts, the rate may change after the account is opened. Visit synchronybank.com for current rates, terms and account requirements. Member FDIC	Min. to earn $0
Capital One 360 Performance Savings APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening. Min. to earn $0 Open Account for Capital One 360 Performance Savings Member FDIC.	APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening.	Min. to earn $0

From there, your next $2,500 would go into a 9-month CD. And finally, your remaining $2,500 could go into a 12-month CD.

Of course, this is just one example, and there are other laddering options you can play around with. The point, however, is that laddering your CDs makes it so a portion of your money is coming due at a different point during the year. That not only gives you more flexibility, but it could be instrumental in helping you avoid a costly penalty.

The danger of not laddering your CDs

The reason CDs typically pay more than savings accounts is that they require a commitment on your part to leave your money in the bank for a preset period. Tapping a CD before its maturity date will usually mean facing an early withdrawal penalty, the exact amount of which will depend on your bank.

Let's say you put $10,000 into a 12-month CD at Capital One. If you end up withdrawing your money at any point prior to the 12-month mark, you'll lose three months' worth of interest per Capital One's policy. For a $10,000, 12-month CD with a 5.00% APY, that translates to a loss of $125.

And remember, banks typically don't let you withdraw a portion of your CD and avoid those penalties. Usually, you're either leaving your CD intact or taking out all of your money, thereby incurring the penalty. With a CD ladder, you may not be looking at a penalty.

Let's say you've put $10,000 into laddered CDs but need $2,500 to cover a cost you weren't anticipating that your emergency fund can't handle. Let's also say you laddered your CDs as per the setup above and now have your first 3-month CD coming due in a week. What you may be able to do is take that money penalty-free to cover your sudden expense while leaving your remaining three CDs alone, thereby avoiding a financial hit.

All told, if you don't ladder your CDs, you risk being penalized. And frankly, you also risk being inconvenienced.

Say you have $50,000 in a single CD and you're offered a once-in-a-lifetime opportunity to take a trip that will cost you $5,000. You can clearly afford it, but cashing out a $50,000 CD could result in a huge penalty. You may decide not to take out your money to avoid that hit -- but that's such a bummer of a situation. With a CD ladder, you may be able to avoid that, so it pays to open several CDs with different maturity dates instead of just one.