I was recently impressed with the concept of CD Laddering. This involves taking a handful of CDs (Certificate of Deposit), spreading their maturity dates out, then re-investing the CD as they mature. This helps make sure you get a good rate of return (like at a 5-year rate) while still having a CD mature at a much more frequent rate (such as yearly)

Lets say I have $5,000 to invest yearly into CDs. Instead of creating a 5-year CD at $5,000 for the first year, I instead create 5 different CDs at $1,000 each: $1,000 in a 1-year CD, $1,000 in a 2-year CD… until the last $1,000 is placed in a 5-year CD.

The 5-year CD will earn a higher interest rate and will be compounded more times than the previous four CDs. However, the following year, the $1,000 in the 1-year CD will have matured. The newly-matured CD plus the $5,000 I have to invest yearly should then be re-invested in a 5-year CD. This cycle continues every year. After five years, a 5-year CD complete with the benefits of being compounded 60 times at a high interest rate will mature yearly!

Categories: Finances