CD Ladders

One strategy for CD buyers looking for higher yielding CD's is to buy CDs that mature farther into the future. That is, instead of buying a one year CD, buy a 3 year or 5 year CD. You may be surprised to know that CD's can have maturities up to 20 years out! Currently, many CD shoppers are buying one year CD's or less, because they are worried that interest rates will go up next year. But what if they don't? The Fed has not changed rates since December 2008, and they haven't given any indication that they will raise rates anytime soon. The risk in CD's is that you don't know what the rates will be in the future. So what's a better approach? Build a CD ladder with CD's that mature in staggered maturities. Many people want their CD's to mature each year so they can access cash for planned purchases or emergencies without penalty. If you build a CD ladder, you will have money available each year to spend or reinvest. So how do you do it? Buy a 1, 2, 3, and even a 4 year, and 5 year CD to begin. As each CD matures, you buy another 5 year CD which will go on the back end of your ladder. After 4 years, you will own nothing but 5 year CD's, but you will have a CD maturing each year, so you can take advantage of available cash, or buy another 5 year CD. Remember, 5 year CD's will always pay more than 1 or 2 year CD's, and if rates start to go back up, they will go up for all CD's not just the shorter ones. So if you are going to buy CD's, do yourself a favor and buy smart, build a CD ladder. For more aggressive investors, the same thing can be done with bonds.