Wallet Hacks

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?


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.

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.

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:

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

Eventually, it's all 12-month CDs.

That's a CD ladder!