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CD Laddering: How it Works

If you're like many consumers these days, you're spending less and saving more. And while high-yield online savings accounts certainly make a great place to stash your savings, their interest rates are variable and thus subject to downward movements in the market. So if you're looking for a better way to make the most of your savings, you may want to consider building your very own CD ladder.

A certificate of deposit (CD) is a basic financial product that allows you to earn a higher rate of return on your cash deposits. In short, you agree to keep your funds with a bank for a specified period of time, and in return the bank agrees to pay you a fixed return. "CD laddering" is a strategy that will not only help you to take advantage of the highest rates possible, but will also ensure you have regular access to your cash.

Here's how a 3-year ladder might work for $20,000 in savings:

  1. Take $5,000 and put it into a high-yield online savings account for immediate access when needed
  2. Next, take the remaining $15,000 and open 3 CDs for $5,000 each. For example, buy a 1-year CD for $5,000, and then 2-year and 3-year CDs for the same amount. The longer the CD, the higher the interest rate should be.
  3. If you don't need the money when the first CD matures after one year, take the full amount and buy another 3-year CD. When your 2-year CD matures, buy another 3-year CD and keep repeating this process as long as possible. As a result, your CD ladder will continue to grow while you enjoy the highest returns possible on your cash.

If you're interested in getting started on your CD ladder today, browse through our recommended High Return Certificate's of Deposit and apply securely online.

on Sun, 2010-04-18 17:00