What is cd laddering and how does it help?

Investing the savings instead of keeping in bank gives better returns in terms of interest rates, even though it puts the investor in the risk of market fluctuations. CD laddering is an ideal investment plan if the investment in big amount and the plan is long term. 

CD Laddering is the process of investing in multiple CDs, each maturing at different time intervals, and reinvesting the returns back into the ladder. This concept is better explained with an example; If an investor wishes to invest $20,000 in CDs, then it can be split into one, two, three and four year certificates, with the current market rates. When the one year CD matures, the amount along with the interest rate can be reinvested into another CD, with the current high interest rates of the market, which will earn more profit to the investor. It is important to wait for the correct market conditions, if some decent profit has to be earned out of a CD ladder.

The biggest advantage of the CD ladder is that, it doesn’t allow the investment to stagnate in one bank, even if the interest rates ascend. Long term investments do not allow the investor to withdraw the CD and reinvest, when the interest rates are really high in the market. With the CD ladder, the investor gets a chance to reinvest at regular intervals of time, allowing a greater flexibility and greater profit. CD laddering is also helpful in avoiding paying penalties to the bank, if there is a need to withdraw money from the investment. Usually, if an investment has to be withdrawn prematurely, the financial institution charges a closure penalty to the investor. With CD laddering, there will be at least one investment that matures, which is helpful if the investor needs some funds from the savings. 

CD laddering works efficiently only if there is enough money to invest for a long time. At the end of the laddering time period, the investor will be left with a nice profit accumulated, earned efficiently from the high interest rates. Because market fluctuations happen every now and then, it is better to wait for a high interest period before reinvesting the money. That way, there will be at least one investment that is reaping the benefits of the high interests in the market. For lesser amounts of money however, single investments for a short period of time is effective.