What is a CD ladder?

There are many areas where one can invest his money for the purpose of gaining returns. Certificates of deposit are one such safe way of obtaining high returns provided you use them in the right way. A CD is where you lock your investment in a bank for a set rate of interest which is available at maturity. Neither the rates of interest nor the duration of the traditional CD can be changed, even in scenarios of rising interest rates, without incurring hefty penalties .Here’s where a CD ladder rises to the forefront. It isn’t illegal but just a really smart investment strategy. It involves a simple method of staggering maturity dates by distributing your investment. You may not receive the highest interest rates but it’s one of the safest investment options.

How it works?

Consider that you want to invest in a CD with an interest rate of 3%  with a maturation of 3 years  but you have requirements for funds at regular intervals and the 6 month CD a  has interest of .8% which is low by any standards for an investor. Consider you also have plenty of resources to invest, the CD ladder can used for precisely this situation. In this investment strategy one can invest his resources into multiple CD’s with duration of maturities at various intervals such as 6, 12,18,24,30 months. you can invest part of your funds into the longest CD and a part of your funds into the 6,12,18,24 month CD however these may offer lesser rates of interest. The returns that are obtained on the maturation of the 6 month CD can partly be utilized for one’s personal purposes and at least the minimum principle investment required for a 30 month CD can be reinvested. This is done for all the subsequent CD’s. But the trick here is that all of the CD’s which mature early should be converted into the longest duration CD.

This is an ingenious strategy which provides the investor with funds at regular intervals as well as fetches him substantial returns. you gain the advantages of a long term CD with the availability of shorter terms. The CD ladder can be as large as you want it. There’s no limit to the quantity of frequency of the ladder, it is left to your discretion. you can plan your ladder in such a way that you get returns at the intervals you want them in. However this is a tedious preposition which requires constant surveillance. It is FDIC insured and the relative risk is minimal.