How to Ladder Certificates of Deposit
Investors desiring the safety of certificates of deposit (CDs) but wanting to boost their returns as much as possible often ladder their CDs. A certificate of deposit is defined by Investopedia as "a savings certificate entitling the bearer to receive interest." Money is invested for a specific amount of time at a fixed interest rate. The CD has a maturity date, with the term of the investment lasting as little as one month or as much as five years. If investors withdraw the money early, an interest penalty usually is imposed. CDs are safe investments as they typically are issued by commercial banks and insured by the Federal Deposit Insurance Corporation. Interest rates are generally higher than in basic savings accounts, and the rates are higher the longer the term of the CD. Laddering CDs means investing your money at different maturities to take advantage of changing interest rates in the future as well as assuring yourself access to money over regular intervals. According to Bankrate.com, "Each year (or whatever term you choose) is a rung on the ladder."
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Things You'll Need
- Money to invest (typically $1,000 or more per CD; some banks have lower minimums)
- Money taken from funds that you won't need for the term you choose or longer
Instructions
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Research CD interest rates and terms available at various financial institutions, including online banks and brokerage houses. Most list these rates on their websites. You can call or visit the institution as well. Make note of the rates for each of your desired terms. For example, the one-, two-, three-, four- and five-year rates; or the three-, six- and nine-month and one-year rates.
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Determine at which institution or institutions you want to invest. For simplicity, invest entirely at one institution. To get the highest rates possible, invest at various institutions if appropriate.
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Decide how much money you want to invest over each term. Divide it evenly or make unequal investments.
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Open accounts at the institution(s), depositing the predetermined amount of money in each CD. For example, invest $1,000 each in one-, two-, three-, four- and five-year CDs.
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Reinvest the money from each CD as it reaches maturity, as long as the money isn't needed. Invest at a term equal to the longest term of your original investment. If you are using multiple institutions, research which institutions have the best rate at the time of maturity.
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Tips & Warnings
Pay attention to maturity dates as maturing CDs will automatically renew at the same term if you do not provide alternative instructions. Institutions will alert you several weeks before the maturity date. Also, there is generally a grace period of up to a week after the maturity date for you to provide instructions. With laddering, a portion of your money will become available at whatever interval you choose. You can add or subtract from that investment before reinvesting.
The typical penalty for withdrawing money from a CD prior to its maturity is loss of a portion or all of the earned interest. When deciding on how much money to invest at each term, consider if and when you might need that money in the future. Deposits at FDIC-insured institutions are insured up to at least $250,000 per depositor through Dec. 31, 2013. If you are investing more than that, spread your investments among various institutions so you will have FDIC insurance. Whether you choose a traditional bank or an online bank, confirm its legitimacy and make sure your deposits are FDIC insured before investing.
