Personal Finance 

Laddering Your Emergency Fund

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There are plenty of articles out there discussing the importance of emergency funds and how to set one up, so this is not going to be one of those. Here, I’ll discuss a strategy to maximize your emergency fund’s interest earnings so that you can lessen the pain of not having the funds in an investment account. The strategy is quite simple and works off the assumption that you are using the emergency fund to cover month to month expenses and not an enormous cost that is in the multiples of a month, though it can handle that too. (it might be easier if you watched this video of laddering CDs)

The Strategy

Ladder certificates of deposit so that you can maximize your interest earnings, minimize risk, and still have access to your funds when you need them. To ladder CDs, you purchase CDs for the amount of each month of savings but with different maturity periods so that one CD comes due each month. Let me us a real life example with ING Direct CDs (though I’d shop around for rates, I picked ING because they make opening a CD a cinch) to illustrate this. Also, for the sake of simplicity, let’s say you’ve saved up 13 months of savings of $13,000, which means 12 months will constantly be cycled into laddered CDs with one month sitting in a high yield online savings account.

  • Month 1: If you look at the ING Direct CDs, you’ll see that they offer 6 month, 9 month, and 12 month CDs (the rates are unimportant). Right now you need to find a CD that matures in 1 month, 2 months, 3 months, etc, but that will be impossible. The solution then is to buy one six month CD, one 9 month CD, and one 12 month CD. This sets you up to have three of your twelve months covered.
  • Month 2: Next month, you purchase another 6, 9, and 12 month CD. This sets you up to have half of the twelve months covered since the first set of 6-9-12 have now become 5-8-11. This puts your six CDs maturing in 5-6-8-9-11-12 months and your on-hand cash at seven months worth.
  • Month 3: You starting to see the pattern? Buying another 6-9-12 puts your total collection of 9 CDs at maturity dates of 4-5-6-7-8-9-10-11-12. At this point you also still have four months in cash sitting in your account.
  • Month 4: Now the pattern changes, since your CDs have now matured an additional year, you are looking at maturity rates of 3-4-5-6-7-8-9-10-11 months, but you can’t buy a CD of less than 3 months so you can only add an additional 12 month CD. This leaves you with three months of cash on hand and CDs maturing in 3-12 months.
  • Month 5: Add another 12 month CD to bring your full collection to 2-3-4-5-6-7-8-9-10-11-12, leaving you with 2 months of cash on hand.
  • Month 6: Add another 12 month CD and now you have a fully laddered 12 month CD structure in place, with 1-2-3-4-5-6-7-8-9-10-11-12 month maturity CDs! You still have one month of cash on hand.
  • Month 7: The first of your CDs has now matured and you’ll roll that into a new 12 month CD so that you have the full collection and still have a month’s worth of expenses in cash on hand. You will repeat this over and over and over …


The primary weakness with this strategy is that you only have a month’s worth of expenses on hand. This lets you weather emergencies that cost less than a month’s expenses and those that have recurring costs, such as job loss. If you lose your job, you’re fine with this strategy because each month you’ll have access to another month’s worth of expenses as a CD matures. One mitigating factor about emergencies with a large cost, you can usually cancel your CD early and surrender the interest you would’ve earned, so laddering may be okay in that situation.

CDs with different maturity periods: What if your bank doesn’t offer 3 and 6 month periods? If you only have a 12 month period, then buy one year-long CD a month for a full year and you can the same laddering. The setup time will be longer and you surrender a bit of interest but there’s nothing you can do.

I hope you all were able to follow this explanation, it’s hard explaining something like that in text and I’m not an artist so it will have to do! 🙂

{ 14 comments, please add your thoughts now! }

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14 Responses to “Laddering Your Emergency Fund”

  1. fred@opc says:

    FWIW, I think your explanation is pretty good. The big thing to consider here is whether you can earn an interest rate on a money market that would be close to the same rate as a CD. You don’t have to actively manage the money market like you do this laddering program, and particularly with some credit unions, savings rates are very close for short-term CDs and money markets. If you’re only making an extra .25-.5%, this could be a lot of work.

  2. Nice idea! I agree, if the interest difference is worth it, this is a really clever way to put your emergency fund to work for you!

  3. Anonymous says:

    a great idea except for the fact that rates on CDs are lousy.

  4. I talk about this all the time in seminars… but I also question the effort / reward of the whole thing.

    You can spend a lot of time only to gain a small incremental return. I guess it depends on how much money you are laddering and what your ability to create other income with that time is.

    Thanks for the article!


  5. Miller says:

    Gotta agree. Maybe I am out of touch with the numbers, but the effort doesn’t seem worth the money. Can you give us a rough estimate of the net money gained each year?

  6. Well thought out post. Once the interest rates go back up I’ll be looking to implement a very similar plan.

  7. I think this is a good idea, and it’s one I’ve been somewhat familiar with for at least a few years. Having an emergency fund in a somewhat liquid position like this while earning interest can really help to keep up with inflation and put the emergency fund to work.

  8. Jeanne-Erin says:

    I have to say, this was VERY clear. I’ve read about laddering before and had not understood it. The step-by-step was perfect and I plan on setting this up once I’ve saved the necessary cash. Thanks!

  9. dave says:

    You can start this at any time – the key is to buy CDs such that only one matures in any given month.

    Start with a 3-month CD ever month for 3 months, and let them roll over until you can afford 3 more.

    Then, when you can afford three more, buy a 6-month CD in the first, second, and third months. In those same months, roll your 3 month CDs back into 3 month CDs. In the 4th, 5th, and 6th months, roll your maturing 3 month CDs into 6 month CDs. If you’ve done it right, you should have 6, 6-month CDs, with one maturing every month.

    Returns on CDs are better than those on savings accounts, but really, they suck. I might try this with 3 month CDs, to give me a little time to liquidate other investments, but 12 cds earning crap rates? Thanks, but I’ll pass.

  10. dave says:

    Forgot to mention: with many banks, you can have them automatically roll-over the CD shortly after it matures, so the only work involved is the initial startup.

  11. Diego says:

    Yes, the interest rates are lousy, but I don’t hear any suggestions from the whiners about a better vehicle.

    Cocoa futures? Lottery tickets? Cases of vodka? Partner in a meth lab?

    Think, McFly, THINK!

    The whiners probably have all their money in the mattress, and they dream of how they’ll clean up when interest rates reach APYs of 50%. Nice dream.

  12. Rob says:

    Two thoughts:

    Laddering is a terrific way to go once interest rates are competitive again. Isn’t it possible that rates will have to rise here very soon as the debt load takes effect or are my ECO 101 factors backwards?

    We like the 6 month plus 1 method. Six months laddered or safe and conservative plus one month MM fund for those unplanned emergencies.

    • Jim says:

      If you think rates are going to increase, the six + 1 method is good because you can then lock in better rates later.

  13. Ken says:

    When you only have $1000 in 6 different CD’s, it is tough to see how the CD ladder is worth the effort. However, imagine having six 6-month CD’s in six different banks, each with $250,000, each earning 4% a year. Now, every month a CD matures, you skim-off the $5000 in interest and drop the principal back into another 6-month CD. I can live off the $5000/month and still will the SAFE principal to my dog ( or whomever ). Sure, I may have to win the lottery to get to that point but I think it adds perspective to the discussion.

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