How to Create a Certificate of Deposit (CD) Ladder

Certificate of deposit accounts have long been a safe place to ensure a guaranteed return on your investment. You simply leave the money in the account for the required period of time and all the interest plus principal is yours to keep. An easy way to make your CDs work even harder is to create a CD ladder. Essentially, you are staggering maturity rates to even out changes in interest rates. For example, say you wanted to invest $5000. If you put all of that into a 5 year CD at 3% and two years later the rate jumps to 5% you have lost out on the opportunity to earn more money. The same can work in the opposite direction as well. However, staggering the maturity dates will allow you to worry less. You may not receive the highest rate over the life of your investment, but you are not going to receive the lowest either. Here are a few steps to help you start your CD ladder.

Instructions

Difficulty: Easy

Things You’ll Need:

• Money to invest.

1. Pick the right bank to invest with. My choice is ING Direct. This is the online branch of ING Bank. With ING you can open a CD in any denomination. Many banks have a $1000 minimum. In addition, ING Direct’s rates are generally higher than many other banks.
2. Decide how many “rungs” your ladder will have. A more aggressive ladder might contain 12, 24, 36, 48, and 60 month maturities. Less aggressive ladders choose shorter terms like 6, 12, 18, 24, and 30 month CDs.
3. Open each account. Each CD you have in your ladder will be a separate account. Work with your bank to open these for the maturities you have selected.
4. Reinvest CDs as they mature. Each time a CD matures, reinvest the money into the longest term CD on your ladder (60 months, for example, in the aggressive ladder). As longer term maturities usually yield the highest rates, your ladder should always be near the top in earnings potential. Also, if you do need some of the money you have invested, every six months (depending on your ladder structure) a portion will be available. You can choose to not reinvest and keep the cash for other purposes.
5. Relax and enjoy the security of FDIC insured investments. In rough economic times, your money will always grow in a CD.

Tips & Warnings

• Shopping around for a bank with the best rates will benefit your investment dollar.