Certificates of Deposit are considered safe investments. However, they do carry a few risks. These risks are related to rising and falling interest rates and inflation. A CD ladder greatly diminishes these risks. Creating a CD ladder is very easy. A few simple steps will have a CD ladder in place.
Basically, a ladder is created by dividing the money to be invested into several Certificates of Deposit. These CD's will have maturity dates set at equal intervals like the steps on a ladder. You can lengthen or shorten the ladder to fit your specific needs.
You first must decide on the length of time of the ladder. You then divide this length of time into equal parts. An example will help clarify this. Let's say that you want a five-year ladder. You choose to have the CDs mature at one year intervals. You divide your total investment into five CDs: a one-year CD, a two-year CD, a three-year CD, a four-year CD and a five-year CD.
You keep the ladder intact by rolling over the maturing CDs into the longest term that you have chosen for the ladder. This would be a five-year CD in the example above. A one-year CD would be changed to a five-year CD when it matures. This continues on through the two, three, four and five-year CDs.
A ladder will offset the changes in interest rates. You will be continuing to reinvest at the new rates while still holding longer CDs that, usually, have higher rates. Also, you will have a better chance of keeping up with rising inflation as the rates on the new purchases will, usually, go up with inflation.
Also, a ladder will offset the risk of needing your money before the CD matures. You will have better access to your money by having CDs maturing more frequently. In fact, you can make a separate CD ladder with three month and six month CDs. This ladder would be rolled into six month CDs as they mature.
A CD ladder is a useful investing tool. It gives you an opportunity to get higher rates. It provides you with access to your money at regular intervals as the CDs mature. Plus, it provides some inflation protection. Once in place it is easy to maintain helping anyone with a busy schedule to keep their CDs organized while earning a better overall rate of return.
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