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5 Steps to Build a CD Ladder Emergency Fund

Collect steady interest payments that could outperform what you’ll earn from most checking and savings accounts by building a CD ladder emergency fund.

Smiling woman putting money in a piggy bank
Marc Guberti, CPFC
By Marc Guberti, CPFC
Melinda Sineriz, ABFP™
Edited by Melinda Sineriz, ABFP™
Updated Dec. 17, 2024
Fact checked

An emergency fund is a useful resource that can address surprise expenses or keep you afloat if you have to find a new job. Although these emergency funds are beneficial, a significant downside is that your money doesn’t always earn a high return in the bank.

FDIC data indicates that the average savings account rate is 0.43% (as of 11/18/24). Luckily, you can earn a much higher return with a CD ladder emergency fund. Some financial institutions offer short-term CDs yielding a 5% annual percentage rate (APY).1 If you want to get a higher return on the cash you have on the sidelines, this strategy can help.

Essentially, you open a combination of short- and long-term CDs to lock in good rates and provide you with access to your funds. Learn the steps to this strategy that combines locking in higher APYs with liquidity.

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In this article

Key takeaways

  • A CD ladder emergency fund could generate a higher return than keeping your money in a checking or traditional savings account.
  • You can open a combination of short-term and long-term CDs to lock in good rates and have quick access to some of your emergency funds.
  • Knowing how soon you will need funds can help you adjust your maturity dates accordingly.
  • There are alternatives available if you want to access your money at any time.

What is a CD ladder?

A CD ladder involves opening multiple CD accounts with different maturity dates. Some CDs mature in a few months and offer quicker access to your capital while others mature after one to three years. Although long-term CDs lock up your money for more time, you also get to secure a good rate for years instead of months.

You can set up a CD ladder so you receive access to some of your emergency funds every three months. A consumer who wants this frequency could evenly distribute their emergency funds into CDs that mature in three months, six months, nine months, and 12 months.

When the three-month CD matures, you will receive the capital you put into that account plus interest. Here’s what will happen when the three-month CD matures.

  • The six-month CD now has three months left on its term.
  • The nine-month CD now has six months left on its term.
  • The one-year CD now has nine months left on its term.

You can choose what to do with the funds from your matured CD. Most people either store the cash in a savings account for upcoming expenses or roll it into a one-year CD to keep the ladder going.

How to build a CD ladder emergency fund

A CD ladder emergency fund allows you to grow your money without putting it into risky investments. You can follow these steps to build your own CD ladder.

Step 1: Decide how soon you want to access funds

You can choose the duration for each certificate of deposit. If you need funds early, you may want a more frequent CD ladder that lets you access some of your cash every three months. Individuals who can wait longer may want to set six-month intervals for their CDs to lock in good rates longer.

Knowing what you want from a CD ladder before comparing banks will help you choose the right bank.

Step 2: Compare CDs from multiple banks

Once you know the maturities you want for your CD ladder, you can compare multiple banks and see which ones have the right CD terms. You should look at a CD’s rate and early withdrawal penalty before committing to an account.

Some financial institutions offer no-penalty CDs which let you withdraw funds at any point without paying a fee. No-penalty CDs have lower rates but offer more peace of mind if an emergency expense comes up.

Tip
It’s a good idea to consider the entire banking experience. The best banks don’t only have great CDs; the top picks usually have useful budgeting tools, loans, investment accounts, and other resources to assist with your financial goals.

Step 3: Open your first CD

If you already have an account set up with your bank of choice, it’s straightforward to open your first CD. The bank already has your information stored, and most financial institutions let you create a CD on their websites and mobile apps.

However, you may find a great CD from a bank that you haven’t used before. In this case, you will have to create an account with the bank before opening your CD.

You will have to provide the following information to open a bank account.

  • Government-issued photo ID
  • Proof of address
  • Social Security number
  • Basic personal information like your name, email, and date of birth

Step 4: Build the ladder

Once you create your first CD, you will be more comfortable with the process and can proceed to build your ladder. You can decide on the maturity dates and if you want to split your emergency funds evenly.

For instance, a person wants to split $10,000 into four CD maturities. Some people may put $2,500 into each CD, while others may put $5,000 into a longer-term CD to lock in a higher rate and spread the rest of the cash among the other CDs.

You should assess your finances and ability to cover emergency expenses before allocating cash across your CD ladder emergency fund.

Step 5: Monitor your CDs and finances

Your finances are constantly evolving. Side hustles, career advancements, new expenses, and inflation are some of the factors that impact your personal finances.

Checking CD maturity dates and assessing your budget can help you decide if it makes more sense to roll over a CD or use the funds to cover living expenses. Consumers with a good grip on their expenses may consider rolling into a longer-term CD to lock in more interest.

Pros and cons of using CDs for an emergency fund

Pros
  • Earn more interest
  • Risk-free returns
  • Flexibility to choose the maturity dates
  • Some CDs are penalty free
Cons
  • Inaccessible funds
  • You may get a lower rate after the CD is renewed

CDs have higher interest rates than the average savings account and offer risk-free returns. You won’t have to worry about volatility and can choose CDs based on their maturity dates.

However, these accounts lock up your funds until the maturity date arrives. You will probably have to pay a penalty fee if you want to access your funds early.

If you feel like you may have to withdraw funds early, consider a no-penalty CD. These CDs have lower rates but let you access your money without paying a fee for an early account closure.

Tip
It’s also important to consider how your CD’s rate will change after the promotional rate concludes. Some banks offer 5% APY as a promotional rate but then automatically renew your CD at a much lower rate. Most banks have a grace period where you can transfer funds out of a CD within a certain amount of days after renewal.

Alternatives to CDs for emergency funds

A CD ladder emergency fund is a great way to generate interest on your extra cash. However, it’s not the only option. These are some of the choices you can consider.

Checking account

A checking account makes your money more accessible. You don’t have to worry about any lock-up period or penalty fees if you need to cover an emergency expense. However, these accounts have the lowest interest rates, so your money won’t grow by much.

High-yield savings account

These accounts make your cash accessible and have higher rates than traditional savings accounts. Online banks usually have better savings rates than traditional banks since they have fewer overhead expenses. However, you are typically limited to six withdrawals per month.

Money market account

A money market account is a savings account that may come with check-writing and debit card privileges. They typically have higher interest rates than other types of savings accounts but usually have a minimum opening deposit requirement.

This is different from a money market fund, which is a type of investment account.

CDs without ladders

You can open a single CD account instead of building a ladder. One CD is easier to manage, and you can roll over the entire account or keep the funds in a checking or savings account when the maturity date arrives.

Recommended CD offers

CIT Bank 6-Month CD - 3.00% APY2

Certificate of Deposit. $1,000 minimum deposit. FDIC Insured.

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Blue Federal 15-Month CD - 4.70% APY3

Certificate of Deposit. $1 minimum deposit. FDIC Insured.

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FAQs

Is a CD good for an emergency fund?

A CD is a good resource for an emergency fund. You can select the maturity date to ensure your funds become accessible when you need them. If any surprises come up, you can withdraw funds from a CD.

There are no-penalty CDs that let you transfer money out of your CD without incurring any penalty fees.

What is a primary benefit of using a CD ladder for your emergency funds?

Using a CD ladder for your emergency funds lets you earn more interest without risking your capital in volatile investments like the stock market. You can choose to have the interest reinvested into the CD or have the interest payments sent to a designated checking account.

Sending interest to your checking account could help you cover monthly expenses while preserving capital.

Is laddering CDs a good idea?

Laddering CDs can be a good idea, but it depends on your financial situation. Consider how long you can cover living expenses without tapping into your emergency fund. A no-penalty CD eliminates the risk of paying a fee if you have to withdraw funds early.

Bottom line

A certificate of deposit allows you to build wealth faster without putting your money into a risky asset like a stock or a mutual fund. These financial products complement emergency funds well.

While emergency funds normally sit on the sidelines without growing that much, a CD ladder emergency fund can grow at a respectable pace. Some banks advertise 5% APY for their CDs, which is very likely more than what you’re getting from your checking account.

Before you start a CD ladder, assess when you will need the funds. If you want to make your cash more accessible, opting for a no-penalty CD allows you to avoid any fees if you transfer money out of your CD before it matures.

Shopping around for CDs will give you a better idea of your available choices. Once you feel comfortable with a bank and your CD ladder strategy, you can start opening accounts and collecting interest. A good starting point is our list of the best CD accounts.

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