A certificate of deposit ladder is an investment strategy used to invest in certificates of deposit when interest rates are rising. Interest rates and CD rates usually rise when the economy is expanding and the Federal Reserve is raising rates to keep inflation in check.

Locking into longer term certificates of deposit when CD rates are rising may prevent you from taking advantage of an increase in CD rates. One way around this is investing in a certificate of deposit ladder. The strategy used in a CD ladder is to evenly spread out your deposits over a period of several years. In the end all your money is deposited in longer term certificates of deposit which pay a higher CD rate.

Let’s look at an example certificate of deposit ladder. We will use a three year CD ladder with $30,000 for this example. You invest $10,000 in a 3 year CD, $10,000 in a 2 year CD and $10,000 in a 1 year CD. After year one, the 1 year $10,000 CD matures, the CD investor then invests the money in a 3 year CD.

After year two, the 2 year $10,000 CD matures, the CD investor invests in another 3 year CD. After two years all the money is invested in 3 year CDs at a higher interest rate. In a raising rate environment, this allows you to get increasingly higher CD rates.

In a falling rate environment it makes more sense to lock in your money at the highest CD rate possible.