How To Use CD Laddering to Maximize the Benefits of Your CD Investments

Barbara Marquand | guest writer for GoTalkMoney

Climbing a CD Ladder to Wealth

Certificates of deposit are a great investment alternative if you already have as much money in the stock market as you feel comfortable with, or you have a short time window for investing. And, unlike the volatile stock market, CDs are safe, simple to understand, and provide guaranteed returns.

The downside of a CD is that you can't get access to your money until the maturity date without paying a penalty and forfeiting a chunk of the interest income. One way to sidestep that disadvantage is by CD laddering.

Better Savings Rates with CD Laddering

With CD laddering, you buy multiple CDs, all at once, with different maturity dates. Each CD represents one rung of the ladder. When a CD matures, you reinvest in another CD, representing yet another rung of the ladder.

For example, say you have $5,000 to invest. With CD laddering, rather than putting all the money in one CD, you could invest in a handful of CDs, making sure that all of them mature at different times. For instance, you could invest $1,000 each in 3-month, 6-month, 9-month, 1-year, and 18-month CDs. That would give you access to cash every quarter of the next 1 1/2 years when each of the CDs matures.

Certificate of Deposit Cash Flow

You can structure the CD laddering to provide the cash-flow you need. With CDs maturing at different times, you have more-frequent access to your cash, without e penalty of early withdrawal, than you would if you invested all your money in a single certificate of deposit.

Flexibility with CD Investments

When each CD matures, you can decide the best investment strategy. You might want to lock in a long-term CD if interest rates are high, or go with a short-term CD if interest rates are low. You can find CDs with terms as short as one month or as long as seven years. You can also structure the ladder to provide cash flow to fit your situation. If you think you'd need access to cash only once a year, then structure the ladder to feature yearly maturity dates. With the $5,000, for instance, you could invest in one-year, two-year, three-year, four-year and five-year CDs.

Longer-term CDs usually offer better interest rates than shorter-term CDs. With CD laddering, you can get the benefit of higher rates with longer-term CDs, but still get the cash-flow benefits because the maturity dates are staggered.

Monitor the CDs to decide how to reinvest them, or let your banker automatically renew the CDs for a portfolio requiring little maintenance.

Shop for Best CD Rates

You don't have to buy all the CDs from one bank. Shop around for the best CD rates for each type of CD. One bank might offer the best rates on one-year CDs while another bank offers the best rates on five-year CDs. Check your local banks, but shop online to compare and find the highest CD interest rates.

When you purchase CDs, make sure you understand all the terms and features, such as whether the interest rate is fixed or variable and whether the bank can "call" the CD--terminate the CD and return your principal and interest earned to date before its maturity.

Stay Under FDIC Limits

CDs are safe because they are insured by the FDIC, unlike investments like stocks and mutual funds. Just make sure your deposits at any one financial institutions are under the FDIC insurance cap, which now is $250,000 per institution, or invest in CDRS (pronounced "cedars") which allow you to be FDIC-insured up to $50 million.


Joan Goldwasser • What You Need to Know About CDs • Jun 01, 2009 • http://www.kiplinger.comhttp://www.kiplinger.com/magazine/archives/2009/06/what-you-need-to-know-about-cds.html

Eric Petroff • Step Up Your Income with a CD Ladder • http://www.investopedia.comhttp://www.investopedia.com/articles/bonds/07/ladders.asp?viewed=1

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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