Certificate of deposit ladders and how they perform

A certificate of deposit is a cash product that will allow you to derive a fixed rate of return over a certain time period. Certificates of deposits offer a much higher rate of return than a conventional savings account and hence they will allow you to preserve your cash while enjoying a larger rate of return then normal. But when you withdraw your money in advance, you will end up losing some of it due to penalties that will be imposed on the certificate. This is the main problem with a CD or certificate of deposit. You cannot withdraw whenever you want and step up to a higher interest rate CD. But there are certain specialized CD’s which allow you to do so. We shall discuss one such CD called the CD ladder which can minimize such minor inconveniences without eating into your initial rate of return.

Now we move on to building a CD ladder. It is not that difficult, you just need to have some basic financial acumen to decide the time interval periods and initial interest rates. For example, if you have around $5000 saved up and want to find a high return investment option, this is the best deal you can get with the least risk. By setting such a ladder, you will be able to begin a regular process which will allow you access to your money and at the same time give you access to rising interest rates in the market.

The working mechanism is very simple. Here we shall explain it in brief.

• You take the $5000 to a financial institution which is insured by either the FDIC or NCUA.
• Then you will open four different CD’s for varying lengths of time. You can put $1250 in each of them. And the terms can be one, two, three and four years.
• Then you just have to sit back and watch the money grow.
  At the end of the first year, when the first CD matures you can put the money along with the interest that was earned in the CD with the longest time period. This is the four year CD in this case. But if you need some of the money, you can always pocket it and put the rest in that CD. But the best way would be to put the entire amount in the four year CD; this will allow you to make the most of the investment.
• Now keep doing this every time a CD matures. If the interest rates are increasing every year due to the good performance of the market, you will definitely benefit out of it. The rates on the four year CD will be much higher than the other CD’s. As soon as you move past the first year, all the CD’s that you own will be earning good rates.

The thing about this system is that you will be getting compound interest from the investment. You are earning interest on your previous interest money along with the principle every time you withdraw the funds at the end of a term. No other cash product can offer such benefits.