How to Set up a Cd Ladder

 A slow economy with low interest rates for financing trickles down to low interest rates for interest bearing accounts such as certificate of deposits.   Interest rates for certificate of deposit products with terms less than 3 to 5 years are barely worth the time and effort it takes to open them, but many investors are hesitant to choose longer terms and lock their money away for an extended period of time for fear that when interest rates increase, they will be locked in to a lower rate and miss out on potential earnings.  Choosing long term CDs also means your money is tied up for a longer period of time, and with early withdrawal fees, you really don’t want to withdraw money from a certificate of deposit before it reaches maturity.  Setting up a CD ladder allows investors to benefit from higher interest rates with longer terms, but doesn’t lock all of the funds into one account.

Rates for certificate of deposits change on a weekly basis, and as an investor you should split up your deposits and disburse your money into multiple CD’s, so you don’t miss out on better interest rates that come along in the future. CD ladders are easy to set up and will allow you to benefit from the maximum interest rates being offered at the time you are opening each account, and give you access to your money more frequently than you would if you put all of your money into a single, long term certificate of deposit. You will need at least 3 certificate of deposits to get started.  The idea is to purchase some CDs with shorter terms and others with longer terms to spread out the interest and stagger maturity dates.

3 Easy Steps to Set Up Your CD Ladder

1. Find a bank that offers the best 3 to 5 year annual percentage yield (APY) on certificate of deposits.

If you don’t currently have a bank you prefer to start your certificate of deposit business with, go to the internet or the newspaper for a listing of current interest rates.  You can shop the interest rates and chose a bank offering the highest yield on 3 year or 5 year certificate of deposit products.  Make sure you take some time to compare CD rates from different providers to find the best certificate of deposit products for your needs and at the highest interest rates you can possibly obtain.  Doing your homework at this stage will generate higher earnings at the end of your CD ladder.

2. Split your deposit among multiple CD’s.  Ladder your accounts.

If you chose a 3 year ladder, split the total amount of your deposit into thirds.  Choose accounts with varying interest rates.  For example: If you have a $30,000 dollar deposit, chose a 3 year CD ladder.  Split your money into 3 deposits amounting to $10,000 each.   Open a 12 month CD with $10,000, a 24 month CD with $10,000 and a 36 month CD with $10,000.   You will have a certificate of deposit maturing at the end of each year, and can make decisions as to whether or not to open new certificate of deposits (at hopefully higher interest rates) or to invest the money in other ways.

3. Roll into larger CD’s at maturity

The general idea of a certificate of deposit ladder is to roll the CD’s into larger terms each time one of your certificates reaches its maturity date.  If you chose a 3 year ladder, roll your 1 year CD into a 3 year CD and do the same with the 2 year , rolling it into a 3 year when it matures.  As your CD’s begin to mature, you are rolling them into CDs with larger dollar amounts (since it now includes the interest it earned in the last certificate that just matured).  You will have access to some of your money every year, rather than waiting the full three or five years for a longer term certificate of deposit to mature.  You will also be less likely to pull money from a CD before it is mature when you have several certificates “laddered” and accessible at various dates.

When you ladder, you will have a CD maturing annually, allowing you to decide what you want to do with your funds while you weather the financial storm.