In both good times and bad, Certificates of Deposit are a safe and secure place to put a large lump sum of money you aren’t planning on spending anytime soon. Yet even with low interest rates and time on your side, it can be just about impossible to net the kind of returns you could be seeing if you put your money elsewhere. This is where a CD ladder strategy comes into play. By spreading your money over several bite-sized CDs staggered across several time periods, you can maximise their advantages in the shortest amount of time possible as well as establish a CD ladder as a long-term financial plan and get the best CD rates.
Here’s how it works:
Let’s say you have $4000 in cash you want to put toward a CD ladder strategy. One way to go about it would be to divide your sum and take out eight separate CDs valued at $500 each. The first four should cover a month-long, three-month-long, six-month long, and one-year long CD. These can be taken out from various banking institutions, yet it’s important to take advantage of low interest rates on short-term loans. Thus larger institutions are probably ideal for the short-term CDs you take out.
The last $2000 should cover a two-year, three-year, four-year, and five-year CD all worth $500 each. For these CDs, opt for small scale financial institutions as they tend to have the best high interest rates for long-term deposits.
NOTE: It’s important that before putting any of your money to a bank under the agreement that you aren’t to touch it for a certain length of time, you make sure you aren’t taking out a “callable” CD. In such CD arrangements, the bank can essentially refund you your money with the interest accrued prior to the maturity date if they think interest rates will continue to work against them. This will work against your CD ladder plan.
After the month-long CD matures is when the fun begins. Take the $500+ interest and put it toward another year-long CD. When the three-month-long CD comes to maturity, you do the same with it. Same goes for the six-month CD.
When the year-long certificate of deposit finally comes around, re-deposit it as a two-year-long CD with the highest interest rate you can find. Then when your other three second-round year-long CDs mature, turn these into high-interest three-year, four-year, and five-year CDs, respectively.
If timed correctly, this will create a situation where a high-interest CD comes to maturity every year for seven years after the initial five, of which anything above $500 is pure earnings from interest accrued over time, multiplied by eight, of course. Principal and interest combined can be used to continue this strategy into infinity.
Some folks prefer a more short-term strategy, uncomfortable with the idea of parting with their money for years at a time when they could be taking advantage of ever-changing interest rates in the interim. There’s certainly an argument for this, and indeed short-term CD ladder strategies consisting of no more than one-year-long maturity rates are more suited for those who prefer to have more access to their investment.
No matter if it’s for the short-term or for years into the future, the CD ladder strategy is a simple way to grow wealth. Incorporating both passive financial planning with aggressive investment technique, you’re unlikely to find a savings scheme as safe and secure as the CD ladder.
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