A certificate of deposit ladder is an investment strategy used to invest in several certificates of deposit to be able to make your investment more liquid and be able to react to higher interest rates each year as the economy fluctuates and interest rates vary over time.
A certificate of deposit is very much like a bank savings account, but the certificate of deposit allows the investor to earn a fixed rate of return that is slightly higher than a typical savings account. Certificates of deposit have a maturity date that lets investors know when it becomes available for withdrawal. Certificates of deposit enable a person to save money by putting it aside in a fixed span of time of their choosing. Certificates of deposit can be in many different choices of terms ranging from as few as three to six months and as long as ten years or more. The longer you tie up your money will result in a slightly higher rate of return. If, in any case, a person decides to withdraw an amount of their earnings or their principal investment before the maturity date, they will be fined with penalties to their accounts in most cases.
Creating a CD ladder can help to prevent these things from happening. By simple staggering the investment of your money in certificates of deposit each month or each year, you will be able to invest in certificates of deposit with higher interest rates as they become available and withdraw money annually or monthly depending on when each investment matures. As each staggered CD matures, you have the option of either reinvesting it into a new CD with a longer maturity and hopefully for a larger interest rate or withdrawing the money completely.
If you have $10, 000 to invest in a certificate of deposit, for example, then the first thing to do is create one account with the minimum amount required (usually $500). You can choose to get the longest term offered, for example 60 months, by the bank for this account in order to achieve the highest interest rates. Then, create another account with the minimum deposit. This time, purchase a 12 month term CD. Create the next account with an 18 month term, the succeeding with a 24 month term, and so on until you have created a staggered ladder with each CD a rung on the ladder. This way, you have accounts that have varying maturity dates with 6 months interval. Hence, you will be able to withdraw your earnings every six months without penalties. Or, you can reinvest the principal amounts on another account with a longer term and higher interest rates.
Each time you withdraw money on your CDs which have already matured, you will be able to take advantage of varying interests set each year. You can capitalize on future increases in interest rates as market conditions change. Your CD ladder will allow you the freedom to invest money as new rates become available.