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Ladder CDs for better rates

By Sheyna Steiner · Bankrate.com
Thursday, June 30, 2011
Posted: 2 pm ET

In order to find the best CD rates in today's environment, savers need to search nationwide and consider online banks. Bankrate has you covered when it comes to searching for the highest rates but your investing strategy can also boost yields over time, for instance, with a CD ladder.

A CD ladder stacks certificates of deposit that mature at different times. The benefit of the strategy isn't apparent until all the CDs have come due and the proceeds have been cycled back into the ladder.

Here's a simplified example:

An investor with $3,000 to invest in CDs could buy a one-year CD, a two-year CD and a three-year CD.

Once the one-year CD comes due, another three-year CD would be purchased. Once the two-year CD comes due, you roll those proceeds back into another three-year CD. The next year, the initial three-year CD matures and another three-year CD is purchased.

After the first cycle, your entire CD portfolio is made up of higher yielding, longer maturities yet you have the liquidity of short-term CDs. In this example, a CD will mature every year.

The laddering strategy is easily adjustable as well. If rates go up next year, after the shortest maturity comes due you can simply extend your maximum maturity by buying a four-year CD, or whatever works with your liquidity needs.

As CD rates are incredibly low -- and will likely stay that way for a while -- sticking to shorter maturities makes sense for now. Some financial advisers I've spoken to have recommended going out no more than three to five years.

Those maturities will allow you to take advantage of the relatively higher rates father out on the yield curve, while still staying short enough you're not locked in to a low-yielding CD for a long period of time.

How have you structured your CD ladder?

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1 Comment
J Christopher
July 02, 2011 at 6:50 pm

I'll have to check with my bank and see if they'll split up my IRA CD into a ladder system.