High CD Method

A CD (certificate of deposit) Ladder is a method for investing in CDs. As you may know, some banks offer CDs with higher interest rates with one caveat: you have to lock your money up for years, sometimes even 5 years! That is a long time to be without your money! But a CD Ladder allows you to take advantage of those high interest rates without having to lock all of your money up at once.

a CD Ladder is a structure for your CDs based on different time frames. Let us use an example. You have $1,500 dollars to invest and your bank will let you buy a 3 month CD which pays 1% interest, a 6 month CD which pays 2% interest, or a 9 month CD which pays 3% interest. You really want the 3% interest but you might need your money during that period. You can take advantage of that rate by doing a CD Ladder! Put $500.00 into the 3 month, put another $500.00 into the 6 month, and put your last $500.00 into the 9 month.

So now you have a 3 month CD at 1%, a 6 month CD at 2%, and a 9 month CD at 3%, but what was the point? The point is that you will now have a CD maturing every 3 months so money will be available, but you can also take advantage of the 3% interest. Yes, only $500.00 will get that 3%, but what if you keep rolling the money over?

Example continued:  3 months go by and your 3 month CD matures (you get paid), but luckily you do not need to use the money, what do you do? Well, your 6 month CD now only has 3 months until it matures, and your 9 month CD now only has 6 months left. Why not take that CD that just matured and make it into another 9 month CD at 3% interest? So now you have a 3 month CD at 2%, a 6 month CD at 3%, and a 9 month CD at 3%! Not bad, now $1,000.00 of your money is earning 3%!

If you continue this cycle, then soon, all of your CDs will be earning 3% interest and you will have $500.00 available to you every 3 months in case you need the money.

A traditional CD is a very safe investment because your money is insured by the FDIC (Federal Deposit Insurance Corporation). Before you place your money into a CD be sure to consult with your bank about whether you are investing in a traditional CD or some other type of CD and verify that your money is insured by the FDIC. It is also important to verify how much of your money is insured.

Other than losing money, you may want to also consult with your financial and tax planners to ensure that the money you invest into a CD will not negatively affect your financial plans or your tax liability. By taking these few steps you can help prevent future surprises.

Nearly all banks offer CDs but it is up to you to locate a bank that offers a good interest rate and a bank that has flexible CD terms so you can form a ladder that fits your needs. If you would like your money in 3 month increments then you will need to ensure that your bank offers 3 month increments. Credit unions also offer a similar investment vehicle but they are commonly referred to as "Share Certificates."