For those depending on certificates of deposit accounts (CDs) for income, anticipating interest rate changes can be challenging. If you are investing in CDs and looking to maximize yield while maintaining some financial flexibility, laddering CDs can be an effective strategy.
Opening CDs with different terms can provide a hedge against sharp swings in interest rates. This strategy generally lets you lock in higher rates with the longer-maturity CDs if rates fall. However, if rates rise again in the next few years, you'll have money available to invest from the CDs with upcoming maturities.
The chart below illustrates how a CD ladder works. Every year, one of your CDs will mature. You can roll it over into a new CD with a longer term and, if rates are increasing, receive a higher rate for the renewal term.
When your 12-month CD matures in 2011, you can reinvest the money in a 60-month CD that matures in 2016.
For example, if you have $100,000 to invest, you might put $20,000 each in a 12-, 24-, 36-, 48-, and 60-month CD. Each year, one of the $20,000 CDs will mature. You can reinvest these assets in a new 60-month CD to maintain the ladder, or we can do it for you with Smart Ladder CDs.
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