Overall interest rates may change while your money is held in a CD. You may also be uncomfortable, locking up all your invested funds for a longer period of time and losing flexibility. If rates rise, you miss out on earning those higher rates, since your money is committed for the entire CD’s term. Conversely, if rates go down, you benefit by having the longer term CD’s continue to pay the rate you were promised. CD laddering, the technique of buying multiple CDs of varying term lengths, can help address this concern.

With a CD ladder, you divide your initial investment into equal parts and invest each portion in a CD that matures every year. For example, say you have $10,000. To build a CD ladder, you would invest $2,500 each in a 6 months, 1-year, 2-year, and CD. As each CD matures, you can reinvest the money at the current interest rate or use the cash for another purpose.