Getting The Highest CD Interest Rates With Laddering?

Answer 1

Certificates of deposit (CDs) are a very low-risk type of investment that can be used to garner higher interest returns than traditional savings accounts. One of the tenets of purchasing a CD, however, is that the money that is invested becomes unavailable until maturity. The CDs that offer the best rates are usually the ones that have the longest terms. The unpredictability of the markets can make some investors nervous when investing large sums of money in a fixed interest instrument that will not change for many years. One solution that some investors use is known as CD laddering.

Laddering is a way that was developed to allow investment money in CDs to become available when needed while also retaining the highest interest rates possible. It can take several years to implement a CD ladder to full effect but the results are often worth the money over time. The first step in implementing a CD ladder is to divide the money that is going to be invested into three equal sums. One-third of the money is placed into a 3-year CD that has a high interest rate. One-third is placed into a 2-year CD and the final third is invested in a 1-year CD.

The money that has been invested in a laddered CD structure will now come to maturity one-third at a time. This staggering of CDs means that one-third of the money will become available each year for renewal or reinvestment. When the first year passes the 1-year CD will mature. The money from that CD is then placed into a 3-year CD. When the 2-year CD matures it is also reinvested in a 3-year CD. At this point all of the money is invested in 3-year CDs. Each year one-third of the investment becomes available for use or renewal.

There are many variations on CD laddering that have been employed. Some investors use 5-year CDs while others employ a technique known as barbell laddering where half of the money is put into very long-term CDs and the other half is kept in very short-term CDs. CD Laddering can help to ensure that the best interest rates are kept despite changes in the market.