The Benefits of Laddering Your CD Investments

If you decided to stock some money away in a certificate of deposit , why not reap the highest benefit over time by laddering your CD investments? What is a CD latter ? I'm glad you asked.

A CD ladder is formed by purchasing multiple CDs at one time with different maturity dates . An example of a CD ladder to maturities of one year, two years , three years , four years , and have a five year CD . These five investments form the rungs of your CD ladder with a certificate maturing every year for the next five years .

For example , let's say you had $ 10,000.00 to invest . You could buy five CDs for $ 2,000 each , each invested for one year more than the first . So you would have a $ 2,000 CD maturing in one year , have another two years , and so on until the last , which has a duration of five years. Every year for the next five years of your CD matures and you earn interest on your $ 2,000 principal amount.

If your certificate of deposit matures , you roll over into another CD . The best strategy is to buy at the longest maturity , which in our example above five years a new CD. This strategy allows you to take advantage of the higher rates normally associated with long-term CDs while maintaining frequent access to a portion of your money .

Another advantage of laddering your CDs is that over time smoothes the high and the low interest rate cycles . Some years the interest rate will be high, the rates will be lower . Other years Currently, banks pay some of the highest CD rates we've seen in the last decade .

Before deciding on laddering your CDs , make sure you can afford to do without the money for a period of time . You will pay a penalty for taking your money before you drink ripe CD .

Also, do not get stuck on the idea that you should invest in a 5 - year ladder. You may be more comfortable with a three- year ladder based on your financial needs . Or you may want a ladder with a 3 months , a six months, one 12 months , and try a 24 month period .

The advantages of laddering your CD investment is that you lose your risk when rates are lower low , increasing your return if interest rates are high , and still have access to some of your money should you need the money for an emergency.

© 2005 Author : James H. Dimmitt

James is editor of " your credit" , a free weekly newsletter with tips to help you manage your personal finances. You Subscribe today and receive e - book ? IDENTITY THEFT - How to avoid becoming the next victim ! ? ? and other cost-saving bonuses by visiting