CD Ladder

What is a CD ladder?

A CD ladder is a strategy for investing in CDs. With the strategy, you will have a CD maturing every month or quarter. When a CD matures -- the day the bank pays you back your loan with interest -- you put it right back into another CD, so the consecutive maturations continues.

For example, lets say I owned 12 CDs and one matured every month for the next 12 months. When next month's CD matured, I would promptly buy a 12 month CD with my original loan amount and my interest earned. I could keep doing this forever and always have a CD maturing every month. The 12 CD's are the ladder.

What are the advantages of laddering?

Since CD's tend to earn a higher interest rate than money markets, I could get a higher interest rate for my cash portion of my money. I could treat the CD almost like cash in a money market because every month I would have my bank repaying me with interest. If necessary, I could take that monthly money and spend it.

What are the disadvantages of laddering?

• It takes many months and it can be complicated to set one up.
• It also requires a substantial amount of funds to make a complete ladder.
• Unlike a money market, you wouldn't have immediate access to all the money in the whole ladder without paying significant penalties. As a result, it is more difficult to call this an emergency fund without committing substantial amounts of money.

How do I setup a CD ladder?

First, reading the investing in CDs page will help.

To make it simple, you can just buy 12 month CD's once every month for the next 12 months. Then, when the first one matures, reinvest it into a 12 month CD along with any additional money you've saved.

Another, slightly more complicated version, is the same as the previous plan, except when the first 12 month CD matures buy a 24 month CD with the maturation money and buy a 12 month CD with new money. This will give you slightly higher returns on your money and give you a bigger ladder.

I wouldn't recommend buying 3 or 5 year CDs because investing in bonds is probably a better option for the intermediate term -- unless you absolutely need the money not to lose value.