A Penny Saved

The word Ladder has come up a lot recently here. Today’s ladder is the CD ladder. A Certificate of Deposit ladder can play an important part in a Savings Strategy. While you can tweak a CD ladder in many ways, here’s the basic concept.

The term CD ladder refers to the strategy of buying CD’s so that they Mature at a set interval. The most commonly used variety is a 3 month CD ladder. In the 3 month CD ladder, one CD from your CD ladder matures every 3 months. The time frame can be stretched or shrunk to fit your personal Savings Strategy needs.

A common fact is that the longer the length of time the CD takes to Mature, the higher the interest rate. A CD ladder lets you take advantage of the higher interest rates while not having to sweat about having all your money locked up for the longer term.

So how do you create a CD ladder. It’s simple. Decide on the time frame of the CD ladder, and how many CD’s you plan on purchasing. It’s important to recognize that you will need enough CD’s to cover your ladder. For instance, if you decide on a 3 month CD ladder, you will need 4 CD’s. The shorter the time frame, the more CD’s. Now buy a 12 month CD in intervals that match your CD ladder time frame.

For a 3 month CD ladder, you would buy one 12 month CD every 3 months for a year. When you buy the last one, the first one should be only 3 months away from maturity. Once the last one is bought, you will have a CD maturing every 3 months. Unless something comes up and you need the money, simply instruct the financial institution to reinvest the money. Another important note is that if an emergency were to come up, the CD can be cashed ahead of maturity. Fees and penalties may apply of course, but your money is still available.

A CD ladder is a good way to have a steady long term investment while not feeling the full effects of long term cash lockup.

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