Investing in CDs with varying maturities

How to build a CD ladder

If a CD ladder seems like a smart strategy for your money, it's easy to create. Determine how much money you can invest in CDs and how frequently you want access to part of your money, such as every year or every few months.

"Think of it like a conveyor belt," says Adam Koos, CFP and president of Libertas Wealth Management Group Inc. in Dublin, Ohio. "You can make the belt as fast or slow as you'd like. You can buy CDs in increments of six months, or you might buy CDs in one-year increments.

"The former would be a quicker conveyor belt, where you've got a CD falling off the belt more often, which gives you a more frequent chance at buying new CDs at hopefully higher interest rates than you're getting now," Koos says.

While purchasing CDs in longer increments (one-year, two-year, three-year and so on) has traditionally paid better interest rates, that's not the case in the current market. By purchasing CDs in shorter maturity time frames, you'll have money frequently coming due, and you will be able to reinvest more quickly into higher-interest CDs when rates do go up, Anderson says.

"The objective of CD laddering is to take advantage of three things: current interest rates, future interest rates and some means of periodic liquidity," Koos says.

Try a savings account?

These days, CD investors are hardly being rewarded for locking into longer-term CDs. For instance, one-year rates average around 1 percent and five-year rates may be up to 1.75 percent. Because interest rates are currently so low, most advisers recommend purchasing shorter-term CDs, with the longest term of your ladder only one or two years. If you continue to roll over maturing CDs into another one- or two-year CD, you'll have incremental CDs maturing every few months and ready to invest again when interest rates rise.

"If you are going to use the CD ladder for emergency funds, the main purpose for those funds is having them available when an emergency happens," Baker says. "If you can gain some interest on the funds, that's a bonus."

While CD ladders can help ensure you have cash available at a given time for a specific need and also allow you to take advantage of interest rate increases over time, carefully consider whether the strategy is right for you right now.

"It may be that chasing after a few extra tenths of a percentage point is more trouble than it's worth, and you'd be better off just placing your money in a high-interest rate savings account, especially if you aren't really sure when you'll need it," says Garrison. "It can be time-consuming to manage a CD ladder, and the difference between three- and 12-month CDs is so small right now, it may not be worth the effort.

"You may actually get better rates with a savings account. It's worth your time to shop around," Garrison says.


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