Certificate of deposit ladders were once seen as easy sources of dependable investment income.
So, is it still worth it to climb the CD ladder?
Lets back up a bit to understand the process.
Whats a CD Ladder?
To understand how a CD ladder works, we first have to discuss how CDs work.
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CDs, orcertificates of deposit, are one of the few guaranteed investments out there.
Stocks rise and fall, and even the interest rate on your savings account changes.
Why do banks offer CDs?
Of course, with a savings account, you’re able to withdraw your money whenever you want.
With a certificate of deposit, you essentially say, Hi, bank.
Then the bank says, That is awesome.
In exchange, we will give you a guaranteed high interest rate on your deposit.
Did you know?
How Does a CD Ladder Work?
Imagine you want to invest $3,000 in CDs.
You want a high interest rate, but you also want access to your money when you need it.
You now have two options:
Another six months pass, and now your 12-month CD comes due.
Six more months pass, and your first 18-month CD comes due.
Lets assume you always reinvest your money.
From this point on, you have three 18-month CDs, each of which is earning you high interest.
Every six months, one of your 18-month CDs comes due.
you’re able to spend what you need, and reinvest the rest in another 18-month CD.
Is it Worth it to Climb the CD Ladder?
Longer-term CDs give you much higher returns.
after you snag enough savings, give the CD ladder a try and see where it takes you.
Your Turn: Have you tried laddering your CDs?
How did it work for you?
Nicole Dieker is a freelance copywriter and essayist.
(Can you sense my millennial sarcasm there?)
You know which ones were talking about: rent, utilities, cell phone bill, insurance, groceries…
