CD Ladder, CD Investing, CD Tips

If you are investing in a certificate of deposit, the CD Ladder method may be the way to go. Here is the best way to find out.

We all want to get the highest CD rates possible. Here are some CD tips. Rates depend largely on term length and the amount of money in the CD. To determine your CD investing strategy, you may need to ask yourself some questions.

• What are you trying to accomplish by investment CDs?
• Is your goal to have the highest possible rate of return?
• Or, is your goal primarily to provide a stable low-risk income?
• How much of your money do you want to invest in CDs?
• When will you need that money?
• Are you okay with not accessing that money for five years? Ten years? More?
• Would you rather have portions of your money available in smaller time increments, such as a yearly basis?

Similar to dollar-cost averaging when you buy stocks, CD Laddering helps insure that you do not invest all of your money at one low interest rate.

You are also usually less than a year away from at least some of your money. It works like rungs on a ladder.

Let's say you have $5,000 to invest. Rather than investing all $5,000 in one five-year CD, you ladder your money by buying CDs as follows:

• One one-year CD for $1,000
• One two-year CD for $1,000
• One three-year CD for $1,000
• One four-year CD for $1,000
• One five-year CD for $1,000

Now every time one of the CDs matures you reinvest it in a five-year CD. Here is an example of how this could work to your advantage.

Let's say there are two investors, each with $5,000 to invest in CDs. Carl uses the CD ladder method and Bob does not. Here are actual CD interest rates from one institution that we will use for this example.

Both investors started their plan in the year 2002. Now let's look at yearly income for Bob and Carl.

Carl ends up with $214.68 more than Bob and has almost 20% more income.

Although Bob does not earn as much interest, there are reasons why his method may better suited to your situation. For example, if you know you will not need your money for at least one year but you will then need it all, Bob's method is the way to go.

Also remember that at the end of the five-year period, Carl only has $1,000 freed up, while Bob has all $5,000 free. Of course, you may not need all of that money at once. Perhaps you are planning on going to college. If you are using the CD laddering method, you can use the money each year as it becomes available. The money that you don't need at the time can be earning interest.

The best method for investing in CDs depends on your situation and what you are trying to accomplish.

Return to the top of CD Ladder

Money-Management-Works Home Page