This Is How Much Money You Can Make With $1,500 in a CD Ladder

When it comes to investing in a popular banking product, a certificate of deposit (CD) is one of your best bets. You don't have to worry about losing money because the best banks carry FDIC insurance and guarantee your money will be safe. And unlike a savings or money market account (MMA), your interest rate is fixed for the entire term of your investment.

If there's a drawback associated with CDs, it's that you must tie your money up for a specific amount of time, but that's where a CD ladder comes into play. With a CD ladder, you divide the money you have available to invest by the number of CDs you wish to open. Next, you open multiple CDs, each with a different maturity date.

Here's a look at how much you could earn by opening three separate CDs and depositing $500 into each (for a total of $1,500).

Your earnings

Three factors go into determining how much you'll earn on a CD ladder:

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1. The term. Most banks offer CDs with terms ranging from three months to five years, although it varies by bank.
2. The annual percentage yield (APY).
3. How much you deposit.

This example assumes you open three CDs with terms ranging from six months to five years. I've used the highest rates I could find as of Aug. 6, 2024.

At the end of six months, your first CD will have matured, and you'll collect $13 in interest. After 18 more months (at the end of two years), you'll have another $47. Finally, when your third CD matures at the end of five years, you'll be able to add another $120. In total, your $1,500 investments would earn you $180. Not bad for a relatively small but mostly risk-free investment.

Factors to consider when shopping for the right bank(s)

When choosing where to open a CD, it's important to look for a bank that provides the features you're looking for. Here are three points to consider.

1. Do you want the ability to withdraw interest without penalty?

At some banks, you'll lose a portion of your interest if you withdraw funds before your CD matures. However, some banks allow customers to withdraw interest anytime, leaving just the initial investment to grow.

2. Do you want all of your CDs under the same roof?

Some people prefer to open all their CDs at one bank to prevent confusion. Others are fine spreading them out among different financial institutions, settling only on the bank with the highest APY -- especially if it means earning more money.

3. Do you prefer to do your banking on the go?

If you routinely pull out your smartphone to make deposits and transfers, you may want to consider the quality of a bank's app and how easy (or difficult) it can make the process.

Laddering reduces your risk of early withdrawal penalties

There's one more big reason to consider laddering your CDs, besides taking advantage of the best rates among multiple banks: You could be charged an early withdrawal penalty if you withdraw money from your CD before it matures. It's a bank's way of encouraging you to leave your money in place for the full length of your CD term.

CD ladders can help with this since they're structured to allow CDs to mature at different times. As a result, you can count on some of your money to be freed up every so often. Knowing money will be available just around the corner may reduce the need to withdraw funds before another CD matures.

If you want to take advantage of the high rates on CDs right now and avoid the risk of early withdrawal penalties, laddering your CDs might just be the way to go.