How to build a certificate ladder that works for you

In simple terms, a certificate ladder is a savings strategy that divides your money among multiple certificates with different maturity dates instead of putting all of it into a single certificate. The goal is to balance earning potential, flexibility and access to your funds over time.

Think of it as not putting all your eggs in one basket. By spreading your savings across certificates with different terms and maturity dates, you can help reduce the uncertainty of future rate changes.

Learn how a certificate ladder works, what to consider when building one, the pros and cons of this strategy—and whether it’s right for you.

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What is a certificate ladder (or CD ladder)?

Term-share certificates (the credit union version of bank CDs) have been a longtime, popular investment tool for people who want a safe and stable place for some of their funds.

Certificates offer a fixed dividend rate over a specified period, known as the term. Because the rate is fixed, certificates can help savers earn predictable returns while protecting money they don't need immediate access to. 

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But a certificate on its own may lack some flexibility since you must commit your funds for the entire term to avoid paying a penalty for early withdrawal.

That’s where certificate ladders come in.

Certificate ladders operate on a simple principle: Instead of investing in a single certificate with a fixed term, you distribute your funds across multiple certificates with different, staggered maturity dates.

Certificate ladder example

What does that look like? Here’s an example:

Instead of investing $10,000 in a single five-year certificate, you could invest $2,000 in five different certificates, each with a maturity date one year apart. This strategy creates a “ladder” of certificates, with one maturing each year.

When each certificate matures, you’ll have the option to renew it to keep your ladder going or withdraw that money.

What are the advantages?

Here are some benefits of certificate laddering:

Increased flexibility

The primary advantage of certificate ladders is their flexibility. By staggering the maturity dates, you have access to a portion of your funds at different times instead of tying up your savings for one long duration.

This feature can be particularly beneficial when rates change because it provides regular opportunities to reinvest maturing funds based on current market conditions.

“Keep your eye on the long run and keep in mind that over time the returns will average out as the market ebbs and flows,” said Dupaco Credit Union’s Tami Brandenburg. “It’s important to stay the course.”

Liquidity

These ladders provide a level of liquidity that a certificate on its own lacks.

This way, you have regular opportunities to access a portion of your money as certificates mature, helping you avoid early-withdrawal penalties.

“Think about things you may need the money for and how long it can be tied up when you choose your certificate ladder terms,” Brandenburg said.

For example, if you think you’ll need to access some of this money more frequently, you could consider laddering with shorter terms. So instead of a certificate maturing every year, maybe one matures every six months.

While certificates aren't designed for everyday spending needs, a ladder can help provide periodic access to portions of your savings as certificates mature.

This liquidity can offer some peace of mind and a safety net that can be especially attractive if you’re a more conservative investor.

Earning opportunities across different terms

Another potential advantage of certificate laddering is that it allows you to spread funds across both shorter- and longer-term certificates. Depending on rate conditions, this approach may help you take advantage of different earning opportunities over time.

Many times, longer-term certificates offer higher dividend rates than shorter-term certificates to compensate for the additional risk.

But by creating a ladder with varying maturity dates, you can enjoy the potential benefits of both short- and long-term rates and give your money in certificates a better chance at growth.

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Lower reinvestment risk

Certificate ladders can also help you manage reinvestment risk. Reinvestment risk refers to the concern that when a fixed-income investment matures, the available rates may be lower than the original investment’s rate.

With a certificate ladder, you can mitigate this risk by reinvesting a portion of your funds each year. If rates decline, only a fraction of your portfolio is affected, minimizing the overall impact.

What are the disadvantages?

Despite its many advantages, certificate ladders aren’t the right choice for all investors.

First, each certificate within the ladder has a fixed term. This means early withdrawal penalties may still apply if you access those funds before a certificate’s maturity date.

Also, certificates generally offer lower growth potential than investments that carry greater risk, such as stocks. Depending on your goals, time horizon and tolerance for market fluctuations, other investment options may be worth considering.

Who should consider a certificate ladder?

A certificate ladder may be a good fit if you:

• Want a lower-risk savings strategy.
• Have money you won't need for everyday expenses.
• Prefer predictable returns over market volatility.
• Want periodic access to portions of your savings.
• Are saving for goals that are several years away, such as a home purchase, education expenses or retirement.

A certificate ladder may be less suitable if you anticipate needing all of your money in the near future or are seeking higher-growth investments that involve greater risk.

Whether you're building your first certificate ladder or revisiting your long-term savings strategy, comparing certificate terms could help you determine the right approach for your goals and timeline.

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