Q: I want to build a CD ladder with equal, 1-year increments from one to five years, but I don't have enough money saved to start it all at once. So, I figure I'll start one CD at a time as I accumulate enough money. My question is this: Should I start at the one-year end of the ladder and add longer CDs over time, or should I start at the five-year end and work my way down the ladder?
A: If you are confident about not having to tap into these savings in the foreseeable future, you would be better off starting at the long end of the CD ladder. In fact, if you do this the right way, it could add considerably to the yield you earn.
How to create a high-yield CD ladder
When most people envision the type of CD ladder you describe, they picture having money spread into a 1-year CD, 2-year CD, 3-year CD, 4-year CD and 5-year CD. However, since you need to buy these CDs at different times in order to accumulate enough savings, you can actually use those staggered start dates to your advantage.
As you probably know, long-term CD rates are generally higher than short-term ones. So, if you make the first CD the 5-year one, right off the bat you should be earning more interest than if you started with the 1-year CD. But the advantage can go beyond that.
Suppose you start a 5-year CD and then over the next year save up enough money to start another CD to add to your ladder. By then, your 5-year CD will be maturing in four years, so at that point you could actually buy another 5-year CD, but your CDs will be starting to ladder because the two CDs will have maturity dates one year apart.
If you bought a new 5-year CD each year for the next four years, you will have built a ladder of CDs with maturity dates ranging from 1 to 5 years away. However, instead of having yields ranging from low short-term yields to high long-term yields, your CD ladder would consist entirely of higher-yielding, long-term CDs.
Then, each time a CD matures, you should be able to roll it into a new 5-year CD and preserve both the maturity structure and the high-yield orientation of your ladder.
Find the best CD rates at every rung
Another thing to note about buying these CDs at different times is that the bank offering the best CD rates may change over time. So, don't assume you should keep getting your future CDs all at the same bank. Shop around in each case to get the best yield available at that particular time.
Good luck with your CD ladder. It may take some patience to build that ladder in gradual increments, but if you do it the right way, that patience can pay off.