During this time of certificate of deposit rate uncertainty, it is good to examine a strategy that can protect your CD Investments from the extreme lows of the rates, yet provide opportunity to take advantage of higher rates. CD Laddering is that strategy.
CD Laddering works best with larger CD investment amounts, but it can be done in smaller increments as well. However, for ease of math, let's use $300,000.00. In this rate environment I wouldn't go beyond 3-year CDs unless you already have a ladder established or a phenomenal rate becomes available on the longer-term CDs.
The basics are to spread out your funds across multiple terms. Then as those funds mature you reinvest them for the longest term you want for your ladder. For instance, taking the investment we suggested above, you can split that in to $50,000 increments. You could invest $50,000 in a 6-month CD, a 1-year CD, an 18-month CD, a 2-year CD, a 30-month CD, and a 3-year CD. Looking at rates listed on bank rate [dot] com that would give us current rates of 4.00%, 4.25%, 4.10%, 4.25%, 4.36%, and 4.50% APY.
It is best to not try to out guess the market, but you also want to be smart. For instance, at this point, it is unlikely for certificate of deposit rates to go much lower. Matter of fact, supply and demand issues, as well as, inflation concerns have pushed rates up a little bit. That is why I suggest no longer than a 3-year ladder. Also when it seems rates may be peaking, extend your ladder out. Many people are wishing they had locked more 5-year rates in at the 5.50% to 6.00% levels that were available back in 2006. Don't pass up good deals though.
We've bee in the financial industry for over 10-years. We have seen rates come up and down during that time. We spend our time looking for high CD Rates so that you don't have to.
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