Starting a certificate of deposit (CD) ladder is simple. The diagram and instructions below detail the process, beginning with dividing the principal and opening the initial set of CDs. In this hypothetical example we will assume that a 3-year CD offers the highest interest rate, that the purchaser wants an equal portion of his/her money to mature each year, and that the purchaser has $30,000 total to contribute to the CD portfolio. You will see that the purchaser will have all of his money in the highest-yield CDs after two years.
Knowing that the highest interest rates are with 3-year CDs and that a portion of the principal should become available for reinvestment every year, this investor will need a total of three CDs in his ladder. The investor will choose the terms of his CDs so that one CD will mature every year for the next three years. His money will be divided evenly into each of the three CDs, labeled A, B, and C.
After one Year, only CD A has fully matured. The investor is now free to put his principal and interest from CD A into a new 3-year CD.
After two years, CD B has also matured, so the investor can now open a third 3-year CD. At this point, all of the investor's money is in the 3-year CDs, earning him as much interest as possible. Furthermore, approximately one third of the investor's money will become available every year. This will allow the investor to reinvest that money elsewhere if he wishes.