investing

How do I: Ladder CDs?

Topic: INVESTING
Who is affected: CONSUMERS AT EVERY LIFE STAGE
DEGREE OF DIFFICULTY: EASY
What you'll need: MONEY TO INVEST, A TIMELINE OF HOW LONG YOU'D LIKE TO INVEST

What you need to know

When investing your money, it can be hard to find safety, great CD rates and liquidity in the same place. But that's exactly what laddering CDs offers.

Instead of having your money in one certificate of deposit, you divide your principal over multiple CDs with different maturities, the longest usually being five years. Each year equals one rung on the ladder.

Every year a different CD matures, and you reinvest that matured CD at the five-year term. However, unlike a stocks or long-term lump-sum investments, as your laddered CDs mature, you have access to the funds without penalty if you choose not to reinvest. This gives you some liquidity while still earning returns.

Laddering allows you to avoid timing the market, coupling lower CD rates and higher CD rates, usually averaging to a higher return than you would get with just one lump sum.

Step-by-step
Read the Bankrate story "How to ladder a CD portfolio" to compare the results of laddering a CD portfolio over five years against putting all your money in one CD.
Start off small when deciding to ladder CDs. This gives you a feel for the process and the expected returns from each investment rung. It also helps if interest rates are starting to grow, or trend higher. Once you are comfortable with the process, you can extend your ladder as the CDs mature.

 

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