Climbing Up the Ladder: The Ladder Strategy in CD

If you're thinking about what to do with your extra income and the best way to invest it, then you have probably heard about certificate of deposits. A certificate of deposit or CD is basically a time deposit that is usually offered by banks, credit unions, etc. In a sense, it is the same as a savings account since it is basically "money in the bank" but unlike a savings account, a CD has a fixed period as well as a fixed interest rate. Also, unlike a savings account, you cannot withdraw that money until the time that it matures or the end of the fixed period where you get to enjoy your initial investment plus the accrued interest.

Sounds like a great option? Yes, investing in CDs is a great way to invest money but there is also a downside to this particular strategy. You won't be able to access this money for that duration that usually last between three months to five years. Also, while the longer you invest the money in a CD, the bigger income it will yield, you will also lose opportunities in investing during a time with higher interest rate. There is a way however around this dilemma and still maximize the best profit by using a strategy called the ladder strategy.

The ladder strategy or laddering is basically distributing your deposits over a period of several years instead of investing all your money into one CD. To better put it clearly, if you have $3,000 then you can use the ladder strategy by investing $1000 each to three CDs, with varying intervals - usually a 3-year CD, a 2-year CD and a 1-year CD. This way, you get faster access to your money but still reap the benefits of a higher interest rate given by the longer-termed CD.

The ladder strategy is a great strategy since this allows you to invest your money and earn interest while your money 'sleeps' in a way but still have access to this money. In fact, what most people do in the ladder strategy is to re-invest the money after the CD matures and keep it going in a cycle, just keeping the accrued interest as income.

You don't have to do it with just one bank in mind though. You can do the ladder strategy with a number of banks, particularly since larger banks offer longer terms while smaller banks may offer a higher interest rate. It is up to you to choose the bank and to continue to keep 'rolling' or to continue investing the principal and accumulated interest into a new CD.

Jane Sanders writes at Certificate of Deposit Rates about getting the best CD rates. Learn more about Ladder Strategy here.

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