Things to know about laddering your certificates of deposit
The current economic scenario has resulted in large fortunes being literally wiped out from the face of the earth. People are losing jobs everyday and prices of assets are depreciating at unprecedented rates. At a time like this, traditional investment options are just not enough to beat the crisis. Certificates of deposits are one such investment option which is known to provide guaranteed returns on whatever investments are made.
Certificates of deposits are fixed investments. You will have to put a certain amount of money in the certificate for a certain period of time. Both the amount and the period will be fixed for the entire investment tenure. And at the end of the tenure you can withdraw your principle as well as the interest from the certificate. But there are other types of certificates that offer variable investment criteria. For example, you can withdraw your money in advance, you can deposit surplus cash, you can change the interest rates etc.
The certificate of deposit ladder or CD ladder is one such type of certificate. It is not a dedicatedly different certificate. It is just a method of investing in certificates with a view to maximize profits and minimize risks. It’s about diversifying your investments.
The mechanism of investing in a CD ladder is all about staggering your investment in an overlapping fashion. Longer term CD’s have a higher interest rate than short term CDs. Hence if you have both of them, you can benefit from both the types of CDs.
The time frame can range from twelve months to even five years based on your needs and ability to make the investment. If you have a twelve month CD ladder with twelve CD’s, then each one of them will expire every month. And you will have to withdraw that one and put the money in the CD with the highest tenure.
The benefits of having a certificate of deposit ladder
They provide better interest rates than a conventional Certificate or a savings account. If you want better returns with reduced risk, this is the way to go.
They will provide you with greater flexibility. The problem with long term CD’s is that your money will be locked in for a long period of time. But the things about laddering is that you will have access to your money every time a CD matures. And you have the choice of whether or not you want to use it.
A CD ladder will give you the best interest rates. You need not go around looking for it. Every year, you can take advantage of rising interest rates.
The CD ladder will smoothen out your gains and losses. There will be ups and downs in the market, but since you have staggered your investments; you will be able to ride out the storm without any problems.
The operation of a CD ladder
The operation is very simple. Buy five different CD’s with time periods of 1,2,3,4, and 5 years. Put the same amount of money in each one of them. The interest rate of the five year CD will obviously be the highest. And the interest rate of the one year CD will be the lowest. When the one year CD matures, withdraw and put it in the five year CD. If you need the money, you can keep a portion of it. Keep doing this every time a CD matures. And at the end of the five year term, you will have a nice nest egg to relax upon.
