How to create a Certificate of Deposit (CD) ladder

When you put money in a certificate of deposit (CD) it means you're giving a certain amount of cash to the bank for a certain amount of time in return for a fixed interest rate, higher than a savings account. And a CD ladder is a bunch of CDs bought at different times to mature at a certain interval. Let's look into how to make a CD ladder as well as why it's good.

Difficulty: Moderate

Instructions

Things You'll Need:

• Money
• Time
• Some researching
• Computer
• Internet

1. First you must pick a bank where you'll place your money into CDs. For a list of competitive bank rates, so you get the most out of your money, go to 'www.bankrate.com' and look under "compare rates".

2. Put into the CD just enough money. For example, if the minimum needed is $1000, place ONLY that amount into the certificate of deposit. Look for 6-month CDs as this won't lock in your money too long. If you have more money to invest in CDs, then a longer maturity period can be used.

3. Buy one of these CDs every first day of each month for six months. On the first day of the 7th month, the first CD that you bought will have matured and you'll get a nice return.
   With your return you can either:
   - buy a new CD for the original amount and keep the return.
   - keep the return and the original amount
   - buy a new CD with the total amount.
   
   Now for every month, a CD will mature, and you can either re-invest or save it for later use.

4. REASONS WHY YOU SHOULD DO THIS:
   - the percentage you get in return is higher than savings accounts
   - by locking in the CD, you can't spend it (you will be penalized for taking it out before maturity)
   - having several CDs allows you to spread out your money and get competitive rates for your money (to be explain in the next step)
   - Can be a great way for you to invest the money you made from eHow (as well as getting a nice return for it too)

5. 
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   An ideal example: 6 CDs bought in successive months
   A $1000 CD matures in March 2009 at 3.50%
   A $1000 CD matures in April 2009 at 3.75%
   A $1000 CD matures in May 2009 at 4.00%
   A $1000 CD matures in June 2009 at 3.75%
   A $1000 CD matures in July 2009 at 4.25%
   A $1000 CD matures in August 2009 at 4.50%
   
   - By the time you buy your CD for maturity at Aug 09, your first CD has matured and you made money.
   - At the same time you can look for other banks with better rates while your CD matures and when it does, place that money right into that account.

Tips & Warnings

• CDs are not affected by the stock market.
• Rock-solid security.
• Considered a fixed income investment because the return you get can be calculated precisely.
• Can be a great place to invest your emergency funds (so you definitely won't be spending them)
• Be aware of when your CD matures. This allows you to get the best % yields. Letting a CD just roll-over isn't good, unless you're sure the terms remain the same.

Resources

• Laddering on Bankrate.com
• the Simple Dollar Blog
• By Shirley Philbrick: How to Manage Women's Finances through all life stages
• How to Open a Certificate of Deposit with High Interest - Patti Winters
• Other Articles by WesleyJ

[pappy537]

on 10/22/2008 Excellent article, thanks.

[slphilbrick]

on 10/7/2008 Your article is an excellent way to show the how and why of the CD ladder. Very good information to have as a resource !

[vikki9]

on 10/6/2008 Thank you for this information about Certificates of Deposit.

[Islando]

on 10/6/2008 Good idea.