In less punishing interest rate environments, CD ladders can be a great way to get higher yields on average as well as consistent and predictable income.
"The farther you out go (in maturity), the higher yield you get, so you get a higher average yield by layering out CDs in say three-, four- and five-year increments. You get the short-term benefit of where interest rates are right now but you can also lock in what the five-year is paying as well," says Robert Laura a partner at Synergos Financial Group in Howell, Mich.
Obviously these days going out to five years won't give you much more yield.
But nonetheless, here's how they work. Let's say you're starting with $10,000 and you'd like your ladder to go up in one-year increments. You would buy five CDs.
$2,000 into a 5-year CD
$2,000 into a 4-year CD
$2,000 into a 3-year CD
$2,000 into a 2-year CD
$2,000 into a 1-year CD
When the one-year CD matures, you would roll that back in to a new five-year CD.
This Bankrate article illustrates how much more lucrative a ladder strategy can be over simply putting all your money into one CD.
This handy calculator can help you set up your own CD ladder.
Unfortunately it's difficult to impossible to construct a ladder these days with such small yields.
Laura recommends that investors get creative until interest rates rebound.
"CD ladders will be great when rates get back up and CDs are at a value that people can live on," he says.
In the meantime, he recommends that investors take advantage of high-yield checking and savings accounts in addition to new products offered by banks such as bump-up CDs and liquid CDs.
Have you gotten creative with your CD investing lately? What did you do?