Rates on fixed interest accounts are higher than they have been in years. This has led many investors to consider locking in these rates by purchasing CDs as an alternative to their savings or money market accounts. For these investors, A CD Ladder might be a good idea.
So, what’s a CD ladder? Basically, you split your money into different CDs with varying maturity dates, like rungs on a ladder. Each rung represents a CD that matures at a different time, from a few months to a few years.
The best part about a CD ladder is that it has some awesome advantages:
1. Diversification: Instead of putting all your money into one CD, you spread it out across several CDs with different maturity dates. That way, you don’t have to lock in all your money for a long time. You’ll have some cash coming back to you periodically, giving you flexibility.
2. Beating interest rate changes: Interest rates can go up and down, which can affect your savings. But with a CD ladder, you’re covered. If rates go up, you get to take advantage of the higher rates as your CDs mature. If rates drop, only a portion of your money is affected, and the rest keeps earning higher rates.
3. Regular cash flow: With a CD ladder, you always have CDs maturing at different times. When each CD reaches its maturity date, you can decide if you want to reinvest the money or use it for whatever you need. It’s like having a steady stream of cash coming in.
Building a CD ladder is pretty straightforward:
1. Figure out how much you want to invest in CDs.
2. Choose different maturity dates for each rung of the ladder. You can go for short-term or long-term maturities, depending on your goals.
3. Divide your investment amount equally among the different CDs based on their maturity dates.
4. Go ahead and buy the CDs. You can get them all at once or build your ladder over time.
5. When a CD matures, decide if you want to reinvest the money in a new CD at the longest end of the ladder or use it for something else. This way, your ladder stays intact, and you keep enjoying the benefits.
That’s it! With a CD ladder, you get the perks of diversification, protection against interest rate changes, and a steady flow of cash. It’s a smart way to make your money work for you.