What is CD Laddering?
Q: I read an article on MSN about CD laddering. Is this a wise investment and for whom? I have less than $10,000 in a standard savings account. Should I put thatmoney in an IRA or ladder that money in CDs? A:CDs are not — strictly speaking — an “investment.” They are what I call “chicken money” — nothing to be ashamed of. It’s the money you can’t afford to lose. The concept of laddering simply means staggering the maturities of your CDs, so if rates rise, some are coming due at different times and you can take advantage of renewing them at higher rates. Conversely, when rates drop, you still have some CDs paying higher rates from before, even as you renew some at lower rates. This can be done with CDs, short-term bonds, Treasury Bills, etc. So laddering is not an investment. It’s a way of handling your fixed-rate investments so you don’t get locked into having them all mature at the same time.
A common fixed-income investment strategy is Certificate of Deposit (CD) laddering. A CD ladder involves taking a sum of money and investing it in various CDs with different maturity dates to produce a predictable cash flow. Once one CD matures the principal is reinvested – at the account holder’s discretion – and the ladder continues. Another benefit of a MoneyAisle CD ladder is that it gives you the ability to spread your money across several banks, limiting the deposit amount per bank to maintain all deposits under FDIC insurance.
CD laddering is simply a plan that has several CDs, say five of them, maturing in sequence over a number of years. Let’s assume you have $10,000 to invest. You go to the bank and buy a $2,000 one-year CD, a $2,000 two-year CD, a $2,000 three-year CD, a similar four-year CD and a five-year CD. Each subsequent maturity date is another rung on your ladder. When the one-year CD matures, you put the money in a new five-year CD. You do this every year, enjoying a combination of liquidity and high interest.
Laddering is a term used to describe CD that are set to run for different lengths of time. Say you have $5000.00. You could but it all in a one year CD, but all your money tied up for one year at one interest rate, say 1% Laddering can get you a better interest rate & keep access to some of your money. The longer you commit the money the higher the interest rate. Example $1000.00 @ 1% for one year $1000.00 @ 1.25% for 2 years $1000.00 @ 2.00% for 3 years $2000.00 @ 3.00% for 5 years At the end of one year you have access t the first $1000.00, interest rate could have gone up or down. You can re-invest for one year or longer or spend. The next year another $1000.00 becomes available. Same options. You keep rolling over the money. Getting the most for your investment.
