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How To Ladder Your Certificate Of Deposit

By Edited Nov 13, 2013 0 0
 
laddering certificates of deposit
Laddering certificates of deposit is a method that helps you get the highest interest rates on your CD's.  Typically when one invests in a CD they are guaranteed a rate that will never change regardless of any future adjustments in the interest rate.  This is where a CD ladder comes in.  A CD ladder will help you get the highest possible interest rates on your CD's.
 
Laddering is the best way to earn interest on certificates of deposit.  To create a CD ladder you take whatever your principle investment is and split it up among CD's of differing lengths of time, which offer different rates.  Typically the longer the length of time your CD is invested the higher your rate will be.
 
For example, if you have $10,000 that you would like to create a CD ladder with what you will do is invest $2,000 in a 1 year CD, $2,000 in a two year CD, $2,000 in a 3 year CD, $2,000 in a 4 year CD, and $2,000 in a 5 year CD.
 
What this will do is give you varying rates of interest so you will get the higher interest rate on your long term investments, and have your shorter term CD's available sooner so you can reinvest the money as you choose.  If you are happy with the long term rate the bank is offering you can reinvest your money in another long term CD as it becomes available.  This way you will never have to wait more than a year to have access to some of your money, as every year another CD will be expiring.  This is important because you may have an unexpected event take place where you need liquidity(be it good or bad, a family emergency on the bad end, or a better investment appearing for your money on the good end).  By keeping a portion of your money available every year you are keeping your options open, while earning a higher return, and having access to a portion of your money every year.
 
Getting the highest possible interest on certificates of deposit is what you are aiming to do with a CD ladder.  Therefore you do not just want to go into one bank and invest in a CD without checking out other rates banks are paying for CD's(because they can be substantially different in some cases).  You can talk to the bank you have your checking/savings accounts with first.   In some cases if you are giving the bank multiple lines of business they will give you better interest on certificates of deposit than they would a non customer. 
 
Once you have talked to the bank you regularly do business with the next step is to check out banks that might be offering a better interest rate than yours.  The easiest way to do this is to use a search engine and type in "find the highest CD rates".  There are many sites that you can visit that compare CD rates from hundreds of different banks.  Just type in how much you are looking to invest and the length of the CD.  You will be given a wide range of banks and what interest rates they are currently offering.
 
Different banks pay different interest rates across the board.  So it might benefit you to carry 3 CD's with one bank and 2 with another, all 5 CD's with 1 bank, or 5 CD's with 5 different banks(using the example given above).  You can mix and match to find the best rates, there is nothing that says you have to give all your business to one bank if they are not offering you the best rates.
 
When you are invested in a CD ladder it is important to always be keeping your eye out for other investments that may be a better place for your money.  As interest rates change a CD might be your best option, or it might not be, but when you're laddering certificates of deposit you will be having a portion of your money becoming available every year so you need to keep your eyes open and decide if reinvesting in your CD ladder is the best option.
 
Creating a CD ladder can be a great way to get guaranteed returns on your money at better interest rates.  Make sure to do your research and look around so the interest on certificates of deposit is the highest you can get.  The stock market can be a risky place to invest your money.  For those who prefer guaranteed growth with no chance of losing your principle investment creating a CD ladder is something that can provide safe growth and higher interest rates than a traditional stand alone CD.
 
 
 
 
 
 
 
-This article is not offering any type of investment advice, just opinions from the author. Always speak to a financial professional before investing your money.

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