CD Ladder

I wanted all of my readers to get a better understanding of how you can make some dollars doing a CD ladder strategy. CD’s come in many different time frames and this very fact can be used to play a game with the rates offered. The longer the time invested the higher the interest rate you will get. The trick comes into play when you might need some of the money and the solution is to do a CD ladder. Basically you will have access to an equal portion of your money every year with this strategy.

For the sake of this example I will only use the 1, 2, 3, 4, 5 year maturity terms for each CD. The rates can be obtained from many sources but if you run your own calculations feel free to use bankrate.com.

After the first CD of 12 months matures you immediately reinvest in another 5 year CD at the five year going rate (unless you need the funds) and this CD will mature in year 6 of your plan. Keep this going with every year, you will add 5 year CD’s from this point on and continue the same cycle forever as one of your CD’s will mature once a year. Form this point on you will continue to build up assets as with each CD maturity you will add more money every year as the accounts compound interest. After the first three years you might say to yourself this is not paying enough, but on average things start to eventually pay a lot more after the fifth year and so forth.

Also this money will be part of your liquid emergency funds as to diversify and compliment your retirement and stock investment accounts. You do not want all your eggs in the stock market as the markets might collapse. In addition to the funds growing for you risk free (FDIC Insured), after the initial account openings of 5 accounts this system will not take much of your time. The only time you have to invest is to go back to the branch once a year to renew the maturing CD to the next 5 year CD and hopefully the rates will be higher than the current 5 year rate of 1.79% when you started the accounts. (Which means you will earn more than my example)

Also something to consider is if you had another sure fire risk free way to make more than 1.79% on your initial investment than it should be considered and favored over the CD Strategy as these rates are very low. Very Important fact to consider: if inflation is more than the rates you are earning then you are losing purchasing power on your money. But it still is more economical than a standard savings account or under the mattress strategy.

*CD’s have a fee if you withdraw prior to the maturity date usually its 3 months of interest as a penalty. All CD’s are protected by FDIC for up to 250 thousand dollars so there’s no need to worry, no risk and all reward. (Even though the reward is less than other investments)

*FYI-These rates on CD’s were offered by Ally Bank which is an online bank and not a regular branch that you can walk into.

*The bank you are giving your funds to will pay you this low rate and loan it out for a much higher yield and that is the reason why banks still offer these types of products. As the economy improves so will these rates and then that will be the optimal time frame to get CD’s.

Another alternative and fun way to watch and make more money.