CD Laddering - Make Your Certificate of Deposit Work For You

If you are looking for a safe, lucrative way to invest a large amount of money for an extended period of time, Certificate of Deposit (CD) laddering may be just the thing you are looking for. It is impossible to maintain great interest rates on single, long-term investments because they are constantly fluctuating. CD laddering allows the investor to continue earning the best interest rates available for as long as they keep their money invested.

CD laddering involves purchasing multiple certificates of deposit, each with a different maturity date. It usually requires a substantial amount of money so it is important to make sure that you can afford to go without that money for an extended period of time. Here is an example of how it works. The investor has $10,000 that he/she wants to invest so they purchase a one year, a two year, a three year, and a four year CD, each worth $2,000. This way one will expire each year for four years. When the first one matures, the investor withdraws the money and any interest earned from it and re-invests it into a new four-year CD. The second year, they will do the same thing with second one. Likewise for the third and fourth year. They will continue to do this every year until they no longer wish to invest their money.

The key to laddering is to get the best interest rates possible when you re-invest the proceeds from one CD into another. This will maximize your rate of return. So, if you choose to use this investment strategy, it would be wise to compare the rates and requirements of several different financial institutions before jumping in feet first.

Besides getting a great return on your investment, there are other added benefits. If by chance you do end up needing some of your money, you will at least have access to it once a year. If you were to put all of your money into a single, long-term investment you would not have that option without taking an early withdrawal and paying a penalty for doing so. An early withdrawal is still an option with CD laddering although it is not recommended. On the flip side of that, you also do not have immediate access to your money. This is ideal because you can not go to the bank and withdraw the money on a whim and end up regretting it later. You are pretty much forced to wait which allows you to thoroughly consider other options before you withdraw your money.

A single certificate of deposit is fine if the investment amount is small and the investment term is short. If you are looking to make a large, long-term investment, CD laddering is the best option. You still have the freedom to determine how your money is invested while getting the highest possible return on that investment.

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