Do you have some money you’d like to deposit in safe investment? You can rarely do better than Certificates of Deposit or CDs. CDs often have a minimum investment amount and are sold for different durations, ranging from 3 months to 5 or even 7 years.
“Laddering” CDs is an effective strategy for lowering the risks of being stuck with a low interest rate for a long period of time while having a good cashflow in the form regularly maturing CDs.
Here’s how it works. If we could predict perfectly in advance whether interest rates were going up or down, we would buy at high rates only and pass on low rates.
However, we can’t predict interest rates accurately; also most of us want CDs that mature at different times, in case we need the cash.
So, we can “ladder” our CDs. For example, we might choose a one-year ladder, meaning we want each CD to mature after one year. If we wanted to buy 4 CDs in total and redeem one every quarter, our strategy might be:
- Buy one (1) 3-month CD
- Buy one (1) 6-month CD
- Buy one (1) 9-month CD
- Buy one (1) 12-month CD
When the first CD matures, use the proceeds to buy a 1-year CD and do the same for the 2nd, 3rd and 4th CDs. This way, you would always have a CD maturing every 3 months. You will also be able to benefit from the best interest rates.
You can also use a 2-year ‘ladder’ to lock in rates for longer.
The objective is to always have some of your money earning the best rate. Happy investing!