You've seen the commercials.
Ordinary people, like you and me, talking about retirements being put
off, moving in with their children and putting off children's college
educations. For many of us, this is the reality after twenty-four
months of the worst recession we've seen in decades. You've
seen friends and neighbors lose their jobs and their homes. Words
like foreclosure, downsizing and bankruptcy have crept into our daily
vocabulary. But, the word that should be creeping into your vocabulary
is CD Ladder.
"CD Ladder?" you say. I've
never even heard of it. I know what CD's are, but I've been
burned with CD's before. I've had my money tied up when interest
rates went up, but I couldn't take advantage of the increase without
incurring huge penalties for early withdrawal on my CD. A CD ladder
is a series of CD's that mature at regular intervals. A CD Ladder
could be the best way to protect yourself against fluctuation in interests
rates and not having all of your money tied up for long periods of time.
As you'll learn, a bad CD rate lasts only as long as the rung span,
the other CD's in the Ladder even out the peaks and valleys of the
Is this some exotic investment strategy
that's going to make me an overnight millionaire? Do I have
to pay my broker exorbitant commissions to get the best return?
Is this a club I need to be a member of to get the best rates?
The answer to each of the previous questions is a resounding NO.
In fact, with interest rates readily available on many sites on the
Internet, researching where you need to put your money to work for you
is easier than ever. Let me show you how to make a CD Ladder work
In order to make CD Laddering a valuable
part of your total portfolio, you'll need to know two things to help
you figure out which CD Ladder is best for you: 1. The amount
of money you have available to put into CD's and 2. The length of
time you want your money tied up for. Once you have these two
questions answered, you can begin your research.
As you already know, a CD is loaning
your money to a bank (or other financial institution*) for a fixed period
of time in return for a fixed rate of return. Yes, there are variable
CD's, but for CD Laddering it is best to use a fixed rate of return.
Usually, the longer CD's have larger rates of return.
In order to show you how to work a
CD Ladder, I am going to use a 1-year rung, meaning that every year
one of my CD's matures. Your initial investment will depend
on your financial situation and the minimum deposit requirements.
The difference will be the length of the CD's. I am going to
buy the CD's to make sure I have one maturing every year for the next
5. At the end of the first year, you will roll over the 1 year
CD to a 5 year CD, and each CD after that which matures you then convert
to a 5 year CD, so you have 5 rungs on the ladder full at all times.
We'll use Year 1 as our starting point so you will see the progress.
Initial Investment (Beginning of YOUR Ladder), Year 1
Rung 1: 1 year CD, CD A
Rung 2: 2 year CD, CD B
Rung 3: 3 year CD, CD C
Rung 4: 4 year CD, CD D
Rung 5: 5 year CD, CD E
Year 2, CD A has matured
Rung 1: CD B
Rung 2: CD C
Rung 3: CD D
Rung 4: CD E
Rung 5: Purchase 5 year CD F
Year 3, CD B has matured
Rung 1: CD C
Rung 2: CD D
Rung 3: CD E
Rung 4: CD F
Rung 5: Purchase 5 year CD G
Year 4, CD C has matured
Rung 1: CD D
Rung 2: CD E
Rung 3: CD F
Rung 4: CD G
Rung 5: Purchase 5 year CD H
Year 5, CD D has matured
Rung 1: CD E
Rung 2: CD F
Rung 3: CD G
Rung 4: CD H
Rung 5: Purchase 5 year CD I
Year 6, CD E has matured
Rung 1: CD F
Rung 2: CD G
Rung 3: CD H
Rung 4: CD I
Rung 5: Purchase 5 year CD J
CD's F, G, H, I, and J are all 5
year CD's that mature at 1 per year.
Remember that you create a ladder or
ladders of whatever length you would like. In a low-rate environment,
you might want to keep the length of the ladder fairly short so you
can take advantage of rates when they begin to rise.
Please understand that times are changing
fast and so should your portfolio. It's a great investment of
your time to understand the best ways to make your money work for you
and your financial future. So, the next time your water cooler
talk turns to finances add CD Ladder to someone else's vocabulary.
They will thank you for that later.
*Other financial institutions do not have the $100,00 FDIC guarantee as banks do, so I recommend using a bank for your CD Ladder.