Updated on 10.05.08

Creating a CD Ladder for Your Emergency Fund or Other Savings to Earn a Better, Safe Return

Trent Hamm

As I’ve mentioned before, my family has a pretty good sized cash emergency fund, somewhere around nine months’ worth of living expenses. Having that amount of cash available is a very nice security blanket for all of us, and in our savings account, it was earning roughly a 3% annual return. Safety, personal security, and a bit of income isn’t bad at all.

Quite often, though, I had the itch to find something better to do with the money. I eyed putting some of it in CDs (certificate of deposit, which basically means you give a certain amount of cash to a bank for a specified period of time – it earns a higher interest rate than a savings account, but you’re penalized most of that return if you cash it in early), but I didn’t want to lock up a huge amount of it for a long period of time. I wanted to always be able to have that cash when I needed it. After doing some investigation, I decided that a CD ladder was the right move for me.

What’s a CD Ladder?
Simply put, a CD ladder is a collection of CDs bought at regular intervals so that they’ll mature at regular intervals as well. Let’s say I wanted to create a simple CD ladder out of six month CDs. I buy one on the first of each month for six months. Then, on the first day of the seventh month, that first CD I bought matures and I collect a nice return. I can then either buy a new CD for the original amount and pocket the return, just keep all of the return and the original amount for some purchase, or I can buy a new CD for the total return. After that, each month, a CD matures and I can either buy a new one or use it for something else.

If you’re doing this with your emergency fund, you can set it up so that you always have a month’s worth of living expenses available in cash and each of the CDs represents a month’s worth of living expenses. Thus, each month, you’ll have a CD mature, collect a higher interest rate, and you can use the returns to buy another CD (if you don’t need it for an emergency), leaving you with a month’s worth of emergency fund at all times.

Why do this? Why not just keep all of it in cash? The biggest reason is that CDs often return a percent or two higher than your savings account. At ING Direct, for example, the CD rates range from 3.75% to 4.5%, while the savings rate is at 3%. Another reason is that by locking it into a CD, you’re not tempted to spend it.

How Are You Doing It?
I started my CD ladder in September by purchasing three $1,000 CDs out of my cash emergency fund. The total was a bit less than a month’s worth of living expenses. I bought a 6 month CD that returns 3.75%, a 12 month CD that returns 4%, and an 18 month CD that returns 4.5%.

So, in September, I held these CDs:
A $1,000 CD that matures in March 2009 at 3.75%
A $1,000 CD that matures in September 2009 at 4.00%
A $1,000 CD that matures in March 2010 at 4.50%

Notice that the shorter-term CDs don’t return quite as well. Specific rates vary all the time, but it’s a rather constant rule of thumb that longer term CDs return better than shorter term CDs. Thus, instead of just buying a single six month CD, I decided to spread things out to get a better return on at least some of the money.

During September, I kept building our emergency fund as I usually do, putting around 10% of our income into it (which is around 15-20% of our monthly living expenses). I’ll keep doing this for the time being.

At the start of October, I bought three $1,000 CDs again out of the cash emergency fund. This left me with six CDs:
A $1,000 CD that matures in March 2009 at 3.75%
A $1,000 CD that matures in April 2009 at 3.75%
A $1,000 CD that matures in September 2009 at 4.00%
A $1,000 CD that matures in October 2009 at 4.25%
A $1,000 CD that matures in March 2010 at 4.50%
A $1,000 CD that matures in April 2010 at 4.25%

You can probably see where this is going. According to my calculations, we’ll have about four months’ worth of cash living expenses in our emergency fund in February 2009 after buying the CDs each month (remember, I’m still adding cash to my emergency fund). Each month after that, a $1,000 CD matures. I’ll then buy a single 18 month CD for $3,000, which would be enough to sustain my family for a month. And I’ll repeat that for eighteen months.

In August 2010, I’ll own eighteen 18 month CDs which will mature in one month intervals, just like clockwork. If I have my calculations correct, we should still have roughly a month’s worth of cash emergency fund at that point. So, I’ll basically have 19 months worth of emergency fund, almost all of it returning 4.25-4.5% or so.

Here’s what things will look like at that point. I’ll have a savings account with one month worth of living funds in it. Each month, an 18 month CD will mature and the proceeds will go into that account – both the principal and the interest on that CD. At the start of the next month, I’ll buy another 18 month CD worth roughly a month’s worth of living expenses. And as long as we’re able to get by just fine on our normal income, I’ll keep this cycle going, as it’ll serve as a huge emergency fund that also returns at a pretty solid rate.

Why not invest it? This is the typical question I hear about cash emergency funds. Usually, such questions are implying that I should put that cash into the stock market and maybe earn a bigger return. I view this as an investment. Since I’m not saving this money for the long term – it’s a cash emergency fund, after all – I want it to be safe, secure, and stable. It needs to be there for me if I need it.

Another reason for doing things this way Following this plan enables something else interesting as well. When this is actually set up and working, it would enable either me or my wife, without skipping a beat, to go back to school. In truth, my wife is considering the move – she’s looking at perhaps going back to school for a master’s degree in 2010 or 2011. Putting this in place makes such a move quite possible.

If you have a big emergency fund that you won’t need all at once, consider starting a CD ladder with the money. Even a six month CD ladder can create a nice bump in your interest on your emergency fund without adding any risk.

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  1. Trent, this is a very intelligent plan. Since “it’s a cash emergency fund, after all – I want it to be safe, secure, and stable. It needs to be there for me if I need it,” a CD ladder seems the most beneficial way and it gives you peace of mind. I think I might try this as well.

    It’ll be interesting to hear your perspective on this in September of 2010. I want it to turn out exactly as you have planned. Way to think it through.

  2. Matt says:

    I completely agree that a CD ladder is the way to go. It’s available if you really need it, but it’s locked up enough that you won’t tap into it when temptation hits.

    I discovered that ING Direct will let you open up a CD with pretty much any balance amount you want, I just opened one up for $50! Now, I only get about 1 cent of interest every other day on that small balance, but I plan on opening up a new CD for $50 every other week for 6 months (I like how it will simulate my paycheck cycle). Then, I just keep adding money to them as they mature and renew. Pretty good way to get a CD ladder emergency fund going for only $600.

    It might seem pretty trivial, but it’s a big psychological gain knowing I had the discipline to set it up. And once the habit of saving up $50 every other week is established, you just keep on saving.

  3. Anonymous says:

    Why not just throw it all in a Rewards Checking and earn 6% on the cash, and have it more liquid? You earn a higher return and have access to all of it if need be…seems like a win/win.

  4. Alison Mayers says:

    Trent, please correct if I’m wrong but you DO save $3000 every month from your income? Buying 3 $1000 CDs every month…

  5. Why not just move some of it to a different bank? I have a bunch of money at WaMu, which returns 4% on a checking account and 5% on a 12-month CD. Granted, these rates could always go down now that WaMu has been acquired, but by locking in the CDs, you’re assured that they won’t for 12 months, at least.

    I also keep a small account open at ING Direct just in case something weird happens with WaMu, but even after the buyout, I never had a problem accessing my money.

    I had 4 months’ cash reserves at WaMu, and I decided that was too much and I didn’t really need that much cash, and just threw some of it into buying 10oz of gold. IMHO gold will return better than 4% over the next year, which is when I plan to cash out and use it as part of a house down payment.


  6. [cyn] says:

    Trent, this is the smartest way yet that I have seen CD laddering explained. Brilliant!

  7. AD says:

    I’ve read about this before, but I’d like to know how much more you’ll actually make using your example versus just leaving it in the savings at 3 percent. I’m curious as to how much more you make versus time spent keeping up with the CDs.

    Also, why does this setup allow you or your wife to go back to school? I missed that connection. Is it because more money is made from the CDs?

  8. KC says:

    I keep a lot in an emergency fund – enough to buy a car (a new car). I keep this much because its what suits our circumstances and budget. And 2 years ago we actually did have to buy a car – since one was totaled – and it was nice not to have to wait on the insurance check. But if your emergency fund is “laddered” how would you access it all (or most of it) when you need it? I agree that in most cases you don’t need it all at once. If you lose your job you are only going to need the money in increments. But what if you do need to access most all of it at one time?

  9. In Canada, we don’t have CDs. We have something like CD called Guaranteed Investment Certificate(GIC). A type of GICs are available which are linked to the stock market performance with guaranteed capital. These are definitely better buy than high interest savings accounts.
    A Dawn

  10. CF says:

    @AD – based on Trent’s numbers, it looks like he’d eventually make about $800 more per year by going the CD route vs. savings. This assumes the same spread (1.5% better on 18-month CD @4.5% vs. savings @3%). By my calculation, he will have 18 months of expenses x $3,000 per month or $54,000 in the CDs once the full set-up is complete. $54,000 x 1.5% spread = $810. It will be less as he carries shorter term CDs, and this can obviously vary based on the savings vs. CD spread, but that’s the difference.

  11. Oliver says:

    at the moment in NZ, the longer term deposits are lower than the shorter terms. The interest rates are based on what they are predicted to be over the term of the deposit.
    There was a good article in the NZ herald not long ago about a simple way to divide your money up into investments. It was by Mary Holm entitled “Refreshing approach to retirement” (you can google it). I thought it would be relevant to bring it up here.

  12. John says:

    For the second round of CDs that you bought, did the interest rates change since the first month? I’m just wondering if it is a rate change or a typo since you reported that the 6 month CDs returned 3.75% each, then the 12 month returned 4 and 4.25, and the 18 month 4.5 and 4.25.

  13. Trent Hamm Trent says:

    John: interest rates on CDs vary all the time.

    AD: we’re trying to build up 18 months worth of living expenses in our emergency fund so that we could jump into such a plan. The CD ladder idea makes the growth easier and makes it harder for us to tap it on a whim.

  14. That’s quite possibly the best plan I have seen for an Emergency Fund. I figured out the 6 month CD ladder on my own, but you’ve obviously thought about it much harder than I have.

    Then again, I’m just starting out building my emergency fund so now I have something bigger to aim for.

  15. You have inspired me and I’m taking that money that I took out of the market last month and setting up my own CD ladder. Excellent post.

  16. Amanda says:

    Great post, Trent. I’d been toying around with a similar idea for a while, and my friend Jeff and I were instant messaging back and forth today discussing your plan. I already had to laddered CDs going, but I decided to add an additional two, and let go of the high cash amount in our EFund. I can’t wait to see how it progresses over the next year or so.

  17. This is a great idea! In todays economy staying safe is the best thing to do. Most people are asking me what they should do because I am in financial services and I keep repeating anything that is safe and you won’t lose money. It’s only bound to get worse than better.

  18. Ellen says:

    Excellent. Thanks. I had this on my mental to-do list of things to investigate but seeing how you laid it out and implemented it is quite helpful.

  19. This is a great explanation of the ladder. The only downside is if you need more than $1,000 to meet your monthly expenses in the event of a job loss or illness or other true emergency. My mortgage payment is more than $1,000 and I would still have to pay my utility bills and eat.

    I’m just to the point of creating the six month emergency fund (ala Dave Ramsey) and I want to make sure what’s in there is very liquid, at least for now.

  20. almost there says:

    I have heard of these ladders for years but have not done any. Based on this reading I decided to try it. I plan to put aside $1000 per month in 3 year CDs at 5% for 36 months so that in 3 years I will have one maturing and rolling over each month. It should take advantage of raising interest rates.

  21. Geoff K says:

    Hi Trent, interesting plan. I haven’t seen it implemented this way before. One question though, when does the interest get paid? If the interest only gets paid at the end of the term then you lose some of the compounding interest aspect – than say if you were getting interest monthly and reinvesting it every month as well. This might be part of the reason why the longer terms pay more interest.

    Here in New Zealand depending on how long the original term is, you can get interest paid, monthly, quarterly or annually.

  22. Brent says:

    Geoff: At ING, interest on the CDs accrues monthly. Interestingly, you can choose to have the monthly interest disbursed to another account (thus, at the end of the CD term, all you have of the CD is the principal — the interest having been frittered away month by month into your savings account or wherever). This would only really be useful if you have a pretty substantial amount in the CD, and it has the downside of losing the compounding effect.

  23. M says:

    I’ve been thinking about this for a while, I will hopefully be retiring in 8 years and would like to set up a little rolling fund, money coming available every month, if I need it I can use it otherwise just let it roll over.

  24. Chris @ Comichacks.com says:


    This sounds great in theory, but how much will you make from such an investment after your first round of CDs have matured? Does the interest accrue monthly or only at the end of the term?


  25. Personally, I’m not a fan of cd/bond ladders for an emergency fund unless you have a very large amount of money saved up.

    If you have an emergency then how do you know that the money required will not exceed one months expenses?

    I would suggest keeping the emergency fund to a reasonable level and any extra can be part of your regular investments

  26. Char says:

    Brent, the interest disbursements are typically for retired people who actually live off only their interest, so they never break into the actual principal in the CD they just have the interest sent back to their checking or their savings where they can use it. Having enough money when one retires to be able to do that is AWESOME but unfortunately not as common as is should be.

  27. brief says:

    This is what I’ve been planning to do – indeed, with the CD vs savings rates being what they are in my country (6-7.25% vs 2-2.75%), it’s pretty dumb of me to be waiting so long. I’m going to ladder my money as four 1-month CDs spaced a week apart; that way, I have a quicker access to my money should I need it, so it will be reasonably safe to put more of my emergency fund on the CDs.

  28. Kevin says:

    Trent –

    Are you going to let the interest stay in the CD upon maturity or are you taking it out each time to put towards another investment or savings account?

  29. Alan says:

    WRT how often you get paid your interest: depends on the CD. Some are monthly, some are semi-annual, some very short term ones pay on maturity.

    WRT ladder vs plain-old-savings: CDS allow to you increase return on your investment by sacrificing liquidity (that is, you make more interest in return for reduced access to the funds). By laddering, you still retain some liquidity since some of the money is constantly coming available.

    I’ve been laddering in 6 month increments rather than one month increments, simply because it means I have to pay less attention.

  30. Catherine says:

    It’s not that I think that this plan wouldn’t work, but it still seems needlessly complicated to me. As someone else said, $1,000 is a pretty small emergency, at least for those of us who are saving and are financially stable (and you’d have to be at that point to implement this plan). And you could still be stuck for two or three weeks for even that amount if the emergency doesn’t happen during the 10-day grace period for the rollover of that months’ CD.

    To me, it makes more sense to keep a little more (a few thousand, maybe?) in a regular savings account, and then ladder fewer longer-term CDs. If it really is a major emergency, the money is still acessible at the loss of the interest.

  31. Cathy says:

    I do the exact same thing. I have about 10-12 months of emergency fund money available, however, I won’t need all of that at once. I keep 4 months available in liquid cash, and the rest I laddered in $1000 increments. If something happened right now, by the time my CDs matured, they will be ready for use. I figured since I don’t need all of the money at once, why not let the extra earn a few more dollars/cents interest?

  32. Sharon says:

    You CAN cash out a CD early. Yes, there is a penalty. I say if you are concerned about that fact, you don’t need the money bad enough to cash it out. If it is a true emergency, it is available.

  33. kz says:

    Is the 18 months’ worth of expenses JUST your emergency fund and doesn’t include other savings? The reason I ask is because my husband and I (no kids, yet, so that might factor into it) have an emergency fund that would fund between 6 and 9 months’ worth of expenses (depending on how bare-bones we stripped the budget). When I read things like this, I think, “wow, maybe we don’t have enough in our emergency fund.” However, if you consider all of our cash savings, we could cover all expenses (except funding 401k, etc.) for almost 20 months. The difference is, most of that is ear-marked for a future car or a future down payment on a house, etc. Of course, we could always delay those purchases if something comes up, but I’m just curious: how do others define their emergency funds? Part of me wants to dismiss this as overkill, but I find myself wondering if I’m missing something and leaving myself (and my husband) open to problems down the road…

  34. Shevy says:

    I’ve actually done the exact opposite with the GICs that make up the bulk of my RRSPs. That is, this week I’m combining 3 different GICs into one so I don’t have a variety of deposits maturing at different times that have to be kept track of.

    While I may break things up and ladder them when I get truly close to retirement (say, within the final couple of years beforehand) I wanted to keep things as simple as possible for the time being.

    Of course, this is retirement savings not an emergency fund. If I had the kind of money you’re talking about in my emergency fund I’d consider laddering that now. However, once I pay for our current emergency (car problems on our sole vehicle that are now approaching $2000) our EF will be wiped out and we’ll have maxed out our cards (we have one card each). At the rate I’m able to save, there won’t be enough to ladder for a long time.

  35. Mrs. Micah says:

    One thing I love about ING Direct is that they let you create your own CD ladder all in one go on one screen. (Since you didn’t mention it, I’ll add that I wrote about it on my site if anyone wants to check that out.)

    I’ve heard people object to keeping EFs in CDs because they think people are less likely to use them. But with a ladder, it’s perfect because there should always be something coming due soon, so you can start with it if you need emergency funds. Less painful than taking it all out of one CD.

  36. Roger says:

    Heh, what a coincidence; I’ve just opened a 6-month CD at ING to start up a ladder, mostly to juice my returns as I try to save for a house down payment mid-2009. Amazing how much fun you can have saving.

  37. Ted says:

    That was a brilliantly written article on laddered CDs. I’m a college student (well, on hiatus for right now, but still college technically) and I have been talking with my father (who is actually the one who turned me onto your site) about doing this myself once I get my emergency fund rebuilt from the last time I had to drain it and have some extra funds in there to play with. I had understood everything about it and then your article pointed out how I could make the gradual increase from a 6 month ladder to an 18 month ladder without the initial time investment. Now I think I have all the keys I need to make this work very soon. Keep up the good work.

  38. Matt says:

    Did you go with an 18 month rotation vs. 12 months because that is the amount of emergency fund you prefer, or because for some unknown reason for a couple weeks the 18 month CD at ING had a higher rate than all other terms?

  39. Kathryn says:

    I’m looking into doing this with our emergency fund. But I’m curious, where do I look for competitive rates? Our bank’s rates are significantly lower than the ones you cited. thanks

  40. Irene says:

    I would like to know which instituions offer this kind of cd ladder? I called both credit unions my husband and I used. Both said they don’t carry this kind of service. Please respond. Thank you Irene.

  41. Gina says:

    @Irene–this is a do-it-yourself project that you can do at any financial institution that offers CDs. While there may be a minimum deposit required, most have lots of maturity schedules to choose from. Check at bankrate.com for banks that offer the best rates. I set up a similar ladder all at once by choosing a 6 month, 12 month, 18 month and 24 month and put the same amount in each one. As each one matures, I plan to renew it for 24 months. That way, I’ll have cash I can tap every 6 months.

  42. carmen says:

    how will this affect your taxes every year? even if you roll it over into another cd, cash it out,or invest some other way, I am curious what happens. thanks

  43. Elliott says:

    I’m coming across this a couple years later … what’s your post-mortem analysis on this?

  44. Josh says:

    Depending on the various interest rates available, you might be do better to just buy a long-term CD (10 years or more) and then pay the penalty if you need the money early.

    Typically, the penalty is simply a loss of the last few months’ worth of interest. However, if the 10-year CD is paying a lot more interest than the 1-year CD, you would likely still come out ahead even if you withdraw early. And since it’s an emergency fund, the odds are good that you’ll never need the money and you get the higher return.

    (If interest rates rise sharply, it also can sometimes be beneficial to cash out early, pay the penalty, and buy new CDs at the higher rate.)

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