A CD ladder is a method of investing in certificates of deposit (CDs) that helps you earn some interest now while reducing the risk of missing higher rates later.
CD issuers such as banks reward savers for choosing longer maturities, that is, for locking up their cash for longer periods, even multiple years.
But your money could end up stuck in a lower-rate CD during a period when interest rates rise.
A CD ladder allows you to invest today and still get those higher rates down the road.
The very old-fashioned tactic of CD laddering is essentially splitting up your money equally among five CDs.
For example, a CD ladder might have:
The idea of a ladder is to create a situation in which one CD comes due every three months. First, the three-month CD matures. Then the six-month CD, etc.
As the months pass, each CD moves closer to its maturity, or expiration, date. Every 90 days, one CD moves down the line and releases your cash to be spent or reinvested.
If the money is needed to resupply your savings account, do so. Otherwise, take the CD that just came due and buy a new 12-month CD.
Another 90 days passes and the new, 12-month CD has nine months left to go, the nine-month has six, and so on. You constantly rebuild the CD ladder as time passes.
If rates move higher you’ll have access to the money and be able to capture those better payouts.
Banks, of course, would prefer that you purchase longer maturities while rates are low, since that would be great deal for them. They get to borrow your money cheaply and lend it out at higher interest to others.
A CD ladder is admittedly a somewhat boring way to earn yield, but it works.
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