CD Laddering
A CD ladder is an investment tool that allows you to lower risk, increase return, and also allows access to a portion of your cash at any given time. The ladder is comprised of several CDs with different maturity dates. As each CD matures, you can roll it over into a new CD with a longer term and higher CD rate.
For example, if you started out with $10,000. If you put all $10,000 into a CD account that matures in 3 years, you won’t be able to access this money without incurring a penalty. In addition, if CD rates increase, you will have missed out on an opportunity to earn a higher return. The flip side, of course, is that if CD rates decrease you will have locked in a higher rate.
Using the CD ladder method, you could purchase 5 CDs at varying maturity dates: 1, 2, 3, 4, and 5 year terms. As each CD matures, it is rolled over into a CD with a 5 year term. Of course, you could choose different terms, and have CDs that mature in 3 month intervals. The key to CD laddering is to use the same term for each CD once you start rolling them over at maturity.
At the end of 5 years, you will have 5 separate CDs with one maturing every year, providing access to your money in the short term as well as protection against fluctuations in CD rates. Many banks provide an automatic CD laddering service, automatically rolling over your accounts as each one matures. A trustworthy bank with relatively high rates and a laddering service that I have used in the past is INGDirect.com.