How to Build a CD Ladder For Maximizing Return

When you ladder your CD investments, you can maximize the potential earnings you are to receive and make the determination as to when they would become available. It is a solid, yet simple way you can take advantage of a safe investment resource.

How to build CD Ladder

CDs, or Certificates of Deposits, are accounts where you can deposit your cash for savings. They are available at nearly every banking institution or credit union. CDs offer a variety of rates which makes them a popular choice over regular savings accounts because you can earn more in interest. The money you deposit is then not accessible until its maturity date, which is the date you are able to withdraw the cash without penalty or opt for a renewal.

The longer the term on the CD, the better the rate you will receive. On a one year term CD, the APY is about 1% with five year terms set around 3%. Generally, the terms offered are 3, 6, and 9 months but some CDs will allow a term of 60 months. You can deposit a minimum dollar amount (usually $500) and receive a bonus rate on larger balances with some accounts. All deposits are insured by the FDIC which guarantees the money from losses. Interest on CDs is also usually compounded monthly or quarterly, meaning the interest also earns interest over time.

How to Ladder CDs

The assets in a CD account are not liquid. You do not have access to the money without early withdrawal penalties until its maturity date has been reached. When you ladder CDs, you can strategically map out your investments to your advantage.

An example of a laddering strategy is this: you are interested in opening a 60 month term CD to get the best rates but want to have access to some of the money yearly. However, the shorter term CD does not provide a good APY rate. Laddering will allow you to benefit from both the higher interest earning potential and still access cash at regular intervals. Here’s how:

You open your 5 year term CD with part of your funds, even if it is only the minimum required. You will have locked in the higher rate you wanted. Next, you’ll take the remaining amount of money you have to invest and open additional CD accounts with varying terms in increments of 12 month periods (12, 24, 36, 48 months) The interest rate will be less than the 5-year term but will still be higher with each incremental term. The first CD at a 12 month term will mature in a year and you can access the funds you need. After taking out what you need, renew the CD for a 5-year term and up your interest earning potential. The following year, the 24-month term CD will mature and cycle will continue until you reach the 5-year term, at which time all of your CD Rates will be locked in for five year periods with a different account maturing once a year.

CD ladder is a completely legitimate way to maximize your savings. You get the benefits of accessing your funds without penalty at the same time earning the highest rates of interest-earning percentages available. There are no limitations to the amount of CDs or the frequency of terms you choose for your money provided minimum deposit terms are met per the bank or credit union.

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