We’ve talked about CD’s before, and for those unfamiliar with a Certificate of Deposit, you might want to check out our previous blog posts including:
Once you’ve got the basics down, we can discuss CD laddering as an investment strategy.
CD Laddering is designed to help you potentially maximize your earnings. Laddering simply means that you hold CD’s with different maturity dates and annual percentage yields.
Why should you use CD laddering?
Suppose that you purchase a five-year CD with an initial deposit of $100,000. Five years can be a long time to part with one’s money even if you can possibly get a really excellent rate for a longer term. Because there are penalties associated with withdrawing money from a CD before its term is over, the five-year term CD could be risky.
However, if you use a laddering strategy you would buy five $20,000 CD’s with your $100,000 with terms of five years, four years, three years, two years and one year. When the one-year term CD reaches maturity you then purchase another five-year CD. When the two-year term CD reaches maturity you then purchase another five-year CD. Repeat this step every year until you have five, five-year term CD’s.
Laddering is a strategy that helps you earn higher interest rates on your money and provides you a greater flexibility because when each CD matures you have the opportunity to renew it or use the money for something else. You have funds maturing each year, which is helpful if you encounter unexpected expenses.
Benefits of CD Laddering
- Liquidity – Cash is available at more frequent intervals than buying one long-term CD.
- Better Interest Rates – Once the ladder is established, you have the opportunity to choose longer-term CD’s that offer a higher interest rate.
- Peace of Mind – When interest rates rise, you will be able to purchase CD’s at the higher rates each year. If interest rates fall, the longer term CD’s you previously purchased were purchased at higher rates, which can feel good in a lower economy.
The Bottom Line
There are two main reasons to participate in CD laddering. One, you build a habit of saving and saving is a healthy habit, no matter how it is accomplished. Two, you can potentially secure higher interest rates by taking advantage of laddering, which means your savings grow at a faster rate. If you’ve got some money lying around give CD laddering some consideration, and if you don’t then make it your goal down the road. And, if you’re in the latter group and not quite there yet, check out our competitive CD rates at https://centralnational.com/rates.asp