CD Ladder Basics: Diversifying With Certificates of Deposit

Tired of living with low interest rates in savings accounts? Maybe you should consider CD laddering.

Heard the phrase, but not sure what it means? A CD ladder. Sounds like a product to stack your music. I wouldn’t say that the phrase is familiar to me, but the concept is.

A CD is a certificate of deposit, a guaranteed investment for your money. Because it is guaranteed, you are purchasing something that has a stated rate of return or interest you can earn on that money. Laddering your CDs is a popular strategy in which you purchase CDs with staggered maturity dates.

CD Ladder Basics: Diversifying With Certificates of Deposit

The purpose really is to fit CD laddering into your investment portfolio with a set time frame between roll over of the deposits. Traditional planners may suggest rollovers to take place annually, so that every year you will have an investment come due and can make decisions based on your current (and the current market) situation. Typically, you would roll that investment over, ensuring that its maturity date follows the course of your other investments.

Building a CD ladder can be done without professional help, if you prefer. Choose a financial institution, bank or credit union that offers a good rate of return and with terms you are comfortable with. Instead of putting all your eggs in one basket, stagger the purchases’ maturity dates. Once one CD matures, roll it into a new one.

Even experienced investors who are comfortable with a high degree of risk should consider purchasing CDs as part of their portfolio. A good financial planner can help stagger your guaranteed investment purchases and build a well rounded portfolio based on your needs and risk tolerance.

How’s My CD Ladder?

Given this year’s lower bank rates, it was discouraging for me when the CDs I purchased four years ago came due in April of this year. Regardless, I stuck to the strategy with the hopes that when the next CD comes due, rates will have increased somewhat and I can purchase the next one at a little better rate. I try to look at it as riding a wave. The good with the bad and all that. If my plan was a solid one ten years ago, I should be prepared for the swings in rates like the one we are seeing now: I’ll have to take the low interest rates with the high rates. Still waiting for the high, mind you.

There have been times over the past year that investing in anything guaranteed seemed like the wrong thing to do, with rates being so low. The way I look at it, any money put away is guaranteed: even with low returns, this money is safely put away. With that comes security and peace of mind. Don’t be afraid if you are only able to put a small amount into each step of your ladder, some money is better than none.

In this very low interest rate environment, there are certain thoughts out there in the financial field that laddering, while still a solid strategy, may be viewed slightly differently now. Some financial experts are suggesting that we shouldn’t purchase any CDs for longer than one year right now. They’re recommending that we make our ladder steps shorter, by purchasing the very best four and six month products. By keeping our ladders shorter with maturity dates closer in the future, we can take advantage of higher rates once rates start increasing, and we won’t be locked into three year investments at 1.5%.

As with any investment strategy, you should do your homework and research all your options. Financial institutions want and need your business, so shop around for the best rates and get professional financial planning advice when you aren’t certain about how to proceed.

I think that CD laddering is a great way to diversify your investment portfolio and allows you to stay fairly liquid even with bank products that aren’t normally considered as liquid. You can then take advantage of the relatively higher rates of CDs (as compared to most regular savings accounts) and still lay claim to your money during certain times of the year, in case you need the liquidity.