A certificate of deposit (CD) is one of the most common low-risk investments in the market. Basically, it’s a type of savings account that allows the account holder to make a one-time deposit, which the bank or credit union will hold for a specific period of time. CDs typically come with higher interest rates, which means that you can grow your money faster as compared to traditional savings accounts. There are plenty of techniques to maximize your CD investment. One of the most effective is called the “laddering technique.
In this article, we will explain to you how this technique works. By the way, if this type of investment sounds right up your alley, check out Marcus CD rates for some of the best interest returns on offer today.
What is the laddering technique?
Essentially, it’s an investment strategy for maximizing the returns you get on a certificate of deposit. It involves the division of investment funds into multiple CDs, each with different terms. Ultimately, this allows the account holder to take advantage of CDs with high-interest rates for long-term investments. At the same time, it also enables the account holder to access some of the funds for short-term financial plans.
Here’s how you should implement the laddering technique:
- Determine the total amount of money that you want to invest and divide it into equal amounts. As explained earlier, CDs are generally low-risk investments. As such, feel free to allocate a more generous amount for investment purposes. On top of that, CDs are insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC covers up to $250,000 per depositor per bank. Bearing this in mind, it would be smart to keep your CD investments below this rate.
- Choose CD terms that will give you access to the investment funds at regular intervals. This could be every six months, one year, 18 months, etc. When choosing the CD terms, be sure to keep in mind the goal of laddering: to give you access to your money at regular intervals while still being able to take advantage of higher interest rates. It’s generally a good idea to have a mix of both short-term and long-term CD terms. Specifically, we recommend dividing your investment into four separate CDs, with two terms of less than one year (e.g., 6 and 9 months) and two long-term CDs (e.g., three years and five years).
- Be mindful of the rates of different banks. The laddering technique is not limited to a “per bank” basis. Instead, you should employ a wider perspective when using this technique. In other words, you can incorporate different CDs from different banks and credit unions to really maximize your returns. This comes with a bit of a challenge as you would have to browse and shop around more extensively to find the best rates.
- Constantly monitor your investments. Even though CDs are typically low-maintenance investments, you should still take a look at how your investment is doing every now and then. Typically, CD investments are paid interest on a per-annum basis, which means that you will be receiving the interest at the end of each year.
Laddering CDs can be a good strategy for investors who want a balance of liquidity and higher returns. By dividing their investment into multiple CDs with different terms, investors can have access to some of their money at regular intervals while still being able to take advantage of higher interest rates on longer-term CDs. However, it is important to note that CD laddering may not be suitable for everyone. For example, it may not be a good choice for investors who need access to all of their money immediately or who may need to withdraw their money before the end of the CD term, as this may result in early withdrawal penalties.