CD ladder – how does it work?

Certificates of Deposit or CDs are also known as Term Shares or Term Certificates. Almost every bank or credit union offers this type of deposit account. CDs offer higher interest rates than usual savings account. Nowadays, rates of interest which you can get from normal savings account are tenth or quarter percent. CDs allow you to earn a little more interest than that. In return of those higher interest rates, you agree to lock your money away for a certain period of time. You are completely free to choose the timeframe for which your money will be accumulated. After the time is over, you can renew your accumulated money at the current interest rate or withdraw. But CDs also have a drawback. You are not allowed to withdraw your money before the end of the term. And if you do so, you will have to pay a penalty. Here comes the advantage of CD ladder, which can give you the facility of a long-term CD with a short-term availability.  

A CD ladder is nothing but a simple investment strategy for investing and managing your money most effectively through your CDs. A CD gives attractive interest rates which is definitely better than any other Money Market Account. On the other hand, it is not as fluctuating as stock market by nature. But instead of these two positive factors, it has a major downside that the money is liquid only along with a huge penalty before the end of the time period. To avoid this problem, CD ladder would be the most helpful as well as legal way. Here is how can you this magic trick to get the most of your investments:

People often expect to get some annual return while investing money. Suppose a CD for a 60 month term offers a rate of 3.2%. But you need such an account which can provide you with some available annual funds. When you inquire about the 12-month term, you get frustrated enough to know that it only earns 0.9%. In this scenario, a CD ladder could be the solution for you. You just need to open several CDs. There is no specific quantity or frequency for CD ladder. Firstly, open a CD for 60 months at the lucrative rate. But do not invest your entire fund in this account. Use the minimal amount in order to get the benefits of this strategy. Now open other CDs for 12, 24 36 months respectively and so on. Though these will come with lower interest rates, just wait and watch. When the 12-month CD will mature, you will get your needed amount. After fetching your required money, renew the remaining. It will give you an opportunity to earn 3.1%. After two years, you just need to do the same and thus your money rolls on. Do not forget to use the same trick for other CDs as renewal of those will always give you better rates. Thus, you will get all your CDs locked in for 60 months but with availability and moreover without penalty.