How to Ladder a CD
By MP Dunleavey
Sent: Thursday September 09, 2010
Your savings is sitting in some near-zero interest account and it's driving you crazy.
Solution: Make the most of available interest rates—a tad low these days—by setting up a laddered portfolio of CDs.
(Err, what's a CD?)
CDs, or certificates of deposit, are like savings accounts with fixed terms. The longer the term you choose (as in, 5 years vs. 6 months) the higher interest rate you'll receive.
Here's how CD Laddering works:
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Let's assume you have $5,000, and this is money you can park for a few years. Divide your savings stash into fifths and buy five $1,000 CDs; each will mature one year after the next (think of them as rungs on a ladder).
$1,000 in a 5-year CD @ 4.5%
$1,000 in a 4-year CD @ 4.0%
$1,000 in a 3- year CD @ 3.5%
$1,000 in a 2-year CD @ 3.0%
$1,000 in a 1-year CD @ 2.5% - In one year, when the first CD matures, you cash it out and buy a 5-year CD with that money. Note: You can do this with shorter time frames, but a longer time horizon yields more growth.
- If you need the cash, you don't have to reinvest it.
- If you do continue to reinvest, cashing out one CD per year and reinvesting it, in this scenario you will end up with about $6,058.
If you had deposited $5,000 in one lump sum in a 5-year CD, you would have ended up with $5,657—about $411 less. (You can use this CD laddering calculator.)
Not only is the return guaranteed, your money is FDIC insured up to $250,000.
Climb on board: Have you laddered CDs? Bonds?
