As you do your research on CD rates, you will often come across the term “CD Ladder”. A CD Ladder is like a rung on a ladder. You will walk into the bank with your initial investment and purchase a CD at every length.

Let’s look at this example –

Say you walk into the bank with $25,000. You will want to split that money up and proceed to purchase a CD. Let’s take $5,000 and invest into a 1-year CD. Let’s take another $5,000 and invest it into a 2-year CD. We will continue to do so until we use up our initial $25,000 investment.

What’s the point of this?

As you look into this logic, you may begin to wonder and ask yourself, “Why should I do this?” and “Why don’t I just invest the whole $25,000 into one CD?” The answer is simple. You are going to receive more liquidity and receive a more stable source of income.

Let’s look into another scenario and show you the results of how much you can possibly make off investing into a 1-year CD for five years straight or using the CD laddering system.

By year, we will look at the average 1-year CD rate average –

2001: 5.85%
2002: 6.10%
2003: 5.60%
2004: 5.05%
2005: 6.50%
2006: 4.00%

According to these rates, when you invest $50,000 and continually invest until 2006, you will end up with around $16,000 in total income.

Let’s now look into the CD laddering system –

If we take the steps noted as above and take $50,000 and split it up into 5 parts, we are going to invest $10,000 into a 1-year, $10,000 into a 2-year, and so forth.

We are now going to take the 2001 1-year CD rate of 5.85% and invest $10,000 instead of the initial investment of $50,000. Every time the CD matures, we will roll that into a five-year CD.

Now, let’s take the 1 year rates as noted above and the 5-year rates as noted below –

2002: 7.10%
2003: 6.20%
2004: 5.95%
2005: 7.20%
2006: 5.45%.

Let’s take our initial investment of our 1-year CD at 5.85%. Once this CD matures, we will take the money and now invest it into a 5-year CD (or whatever length you prefer) and receive a rate of 7.10%. Once, 2003 rolls around, your 2-year CD will mature. We will continue to do this process until you choose to stop.

By now, you will see why this can be a great source of income. Once you start and reach the 5 year mark, you can either continue to re-invest the money into more CDs or you can simply stop and put the money elsewhere.

If the rates are good and continue to stay high, you will notice a difference between laddering your CDs and simply investing all of your money into one set CD.

Website’s have made it easy to see how much you can make with a CD ladder. For example, Bank of America has a simple CD ladder calculator, which can be found here.