A certificate of deposit or CD is a time deposit, an investment of a specific amount of money over a specific time period for a specific rate of interest. Some variations on these basics are now offered but the standard investment remains available. Banks, savings and loans, and credit unions offer CDs in amounts of $1000 up to the maximum insurable amount of $100,000, and for terms ranging from one month to five years.

You can decide how long to invest by considering how long it will be before you need the money for some other purpose, or by studying interest rate trends. If you or an advisor believe that rates will rise in the future, a short term investment is best since you can reinvest at the higher rate you anticipate in the near future. If you believe rates may fall, buy for a longer term so that you can maintain today’s higher rate while others invest at the prevailing lower rate. It may not seem like a quarter of a percent is a tremendous difference maker but over a lifetime of investing those quarters of a percent can add up to a significant amount of money.

If it is unclear what rates will be in six months or a year, a strategy called laddering can be used to keep your money consistently invested for longer terms, which typically pay higher rates, with the most flexibility.

In ladder strategies the investor distributes the deposits over a period of several years with the goal of having all of your money deposited for a long term and therefore the higher rate, but in a way that part of it matures each year. In this way you receive the benefits of the longest-term rates while retaining the option to re-invest or withdraw the money in shorter-term intervals.

You start the ladder by buying several CDs at one time but with different maturity dates. Every year one of your CDs will mature and you can roll it over into a new CD with a longer term (if rates are high) and higher rate.

Each CD is like a rung on a ladder. When the one-year CD matures, roll it over into a new CD for whatever term you decide to use for your ladder. A five year term may pay a higher rate but you may be uncomfortable with tying the money up for that long, so you may choose three years. When the two-year CD matures, roll it over into a new CD for the longest term you feel is right for you. When the three-year CD matures, do the same thing for the same number of years. You can choose a shorter or longer term when you begin the ladder, but the key is to use the same term for each one once you start rolling them over at maturity.

At the end of five years you’ll have five CDs with one maturing every year so you’ll never have all of your money tied up long-term or at lower than market interest rates.

As an example, a three-year ladder strategy begins with a deposit of equal amounts of money into a 3-year CD, a 2-year CD, and a 1-year CD. From this point on a CD will reach maturity every year, at which time the investor would re-invest at a 3-year term. After two years of this cycle, the investor would have all money deposited at a high rate three-year rate, yet have one-third of the deposits mature every year, which can then be reinvested, changed in amount or type, or withdraw.

Responsibility for maintaining the ladder belongs to the depositor, not the financial institution. Because the ladder does not depend on the bank, depositors are free to distribute a ladder strategy across more than one bank, or savings and loan, or credit union. This can be advantageous as smaller banks may not offer the longer terms found at some larger banks but smaller banks may offer better rates, and institutions other than banks can offer higher rates too.

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