How I Use a Certificate of Deposit Ladder for Emergency Funds

We keep twelve months of expenses as an emergency fund and I've often been asked – “what do you do with the money?”

The answer: nothing.

It has to be 100% safe and 99.999% liquid in case of emergencies so I don't do anything foolish like stick it in the stock market

When I say nothing, I don't mean absolutely nothing. It's currently in a high yield savings account but…

… when it makes sense, I put it in a certificate of deposit ladder, or CD ladder. This was far more effective when interest rates were higher but it's something you can still do today if the numbers work out.

What's a CD Ladder?

Learn how to build a C.D. ladder for ultra-safe savings to maximize your interest rates.
It's a series of certificates of deposit that mature on a monthly basis. When a CD matures, I roll it over into a new 12-month CD. In the event I need my emergency fund, I stop rolling them over and I use the money. Since my emergency fund is based on expenses, each month I have a month's worth of expenses maturing and being accessible to me. If I am hit with an emergency that is greater than one month's expenses, I can always close the CDs and take the small penalty.

One added benefit to rolling over my CDs is that my bank, Ally Bank, typically offers a bonus interest rate if you renew a CD!

How do I execute this?

In the beginning, it's really easy. First, find a bank that offers you a high interest rate for certificate of deposits. Right now, the rates aren't that great across the board so I can't recommend any particular bank. Ally Bank, which is the one I use, offers 1.00% APY on a savings account but just 1.05% APY on a 12-month CD. With that kind of spread, I'm going to just keep it in cash because I'd rather have flexibility than an extra 0.05% yield. Another benefit of Ally Bank CDs is that the penalty for closing it early is only 60 days, it's typically much bigger at any other bank.

But for the sake of explaining the system, let's say the rates are favorable and I wanted to get money in as quickly into CDs as possible. I'd put 1-month of expenses into a 3-mo, 6-mo, 9-mo, and 12-mo CD.
Round-1-CD-Ladder

Simple enough right? The following month, I'd do it again. Now I would have CDs with a maturity (in months) of 2, 3, 5, 6, 8, 9, 11, and 12. (new CDs in bold) Last month's 3/6/9/12 month CDs have all gotten one month older, they are now 2/5/8/11 month CDs.
Round-2-CD-Ladder

The following month, repeat. Now I have CDs with a maturity of 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12. Now it looks like this:
Round-3-CD-Ladder

The following month, the first 3-month CD will mature and I put it in a new 12-mo CD.
Round-4-CD-Ladder

Eventually, it's all 12-month CDs.

That's a CD ladder!

You can also invest in brokered CDs if building a CD ladder at your local bank isn't for you.

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Jim Wang

About Jim Wang

Jim Wang is a thirty-something father of three who is a frequent contributor to Forbes and Vanguard's Blog. He has also been fortunate to have appeared in the New York Times, Baltimore Sun, Entrepreneur, and Marketplace Money.

Jim has a B.S. in Computer Science and Economics from Carnegie Mellon University, an M.S. in Information Technology - Software Engineering from Carnegie Mellon University, as well as a Masters in Business Administration from Johns Hopkins University. His approach to personal finance is that of an engineer, breaking down complex subjects into bite-sized easily understood concepts that you can use in your daily life.

One of his favorite tools (here's my treasure chest of tools,, everything I use) is Personal Capital, which enables him to manage his finances in just 15-minutes each month. They also offer financial planning, such as a Retirement Planning Tool that can tell you if you're on track to retire when you want. It's free.

He is also diversifying his investment portfolio by adding a little bit of real estate. But not rental homes, because he doesn't want a second job, it's diversified small investments in a few commercial properties and a farm in Illinois via AcreTrader.

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  1. Lanny says

    Hi Jim. This is very simple but genious. I used to have a few 1-month CDs spread out on different dates and have them automatically roll over monthly. If I need the money, I just find the nearest date and I didn’t get any penalty.
    Greetings from Indonesia.

  2. David says

    I also use Ally and I can’t recommend them enough. I agree that the .05% doesn’t make sense but for one reason: keeping my grubby paws off of it. When it’s “locked” into a cd, even if the difference is pennies, I’m still less likely to use it for something random unlike my saving account. So I am working on the ladder by buying a single 12 year cd each month out of the emergency savings account. When I’m done I will have the emergency fund mainly in the cds, with a small amount (maybe $1000) left in the fund for something random that may pop up. Overall though I like this strategy because it forces you to stick to a monthly plan to buy the cds which is a good thing to learn. Now…if only we could get the unicorn rates of 4% back šŸ™‚

    • Jim Wang says

      You make a great point, sometimes it’s not about the interest but more about the psychology of leaving it alone because you “feel” like it’s locked in.

      • David says

        Yep and with Ally it’s literally an online chat and a click to cash it in if something major happens (I cashed one in years ago and it was minutes after cashing it, the money was in my Ally account…I’m sure it would take longer to transfer to a non-Ally account).
        A final benefit I see to the ladder is that when the CD matures, you can let it roll over automatically, or even bump it a little. So a $500 CD rolls over and in a year its $510 or whatever with the interest…at that time it’s pretty painless to scrounge up $90 round that up to a $600 CD when you renew. So the ladder can trickle up that way as well if you want your emergency fund a little beefier as your home/car ages or family grows etc.

  3. Alishah says

    Do you have an easy breakdown of how you can eventually turn this CD ladder into a 3 or 5 year ladder? I love the idea of having cash available each month, but would eventually like to extend it further past 1 year CDs.

  4. Scot Vandagriff says

    I have several accounts already with Cap One. Iā€™m interested in building a CD ladder with them BUT they only offer 6, 9, and 12 month CDs. Is there a way to tweak this formula without the 3 month or should I get a 3 month CD elsewhere ?

    Thanks

    Scot

    • Jim Wang says

      You could get a 3 month CD elsewhere but with rates so low, it might be worth opening a new account solely for it.

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