A Comprehensive Guide to CD Laddering
Posted on January 28, 2023 at 2:52 PM by Service Plus
CD laddering is a strategy for investing in certificates of deposit (CDs) that can help you earn higher interest rates while also maintaining access to your money. In this comprehensive guide, we'll explain what CD laddering is, its advantages, and how you can use it to make the most of your savings.
A Comprehensive Guide to CD Laddering
A certificate is a type of savings account that typically offers a higher interest rate than a traditional savings account. The catch is that you must commit to keeping your money in the account for a specific period—usually ranging from a few months to several years. If you withdraw your money before the certificate matures, you'll typically have to pay an early withdrawal penalty.
CD laddering is a way to get around this limitation by investing in a series of certificates with different maturity dates. The basic concept is to divide your investment into several certificates with different maturities and varying interest rates. When done properly, CD laddering can maximize your return on investment and provide you with a steady stream of income.
Advantages of CD Laddering
The benefits of CD laddering are twofold. First, it allows you to earn higher interest rates on your money by investing in longer-term certificates. Second, CD laddering allows you to adjust your investments to meet your current financial needs. If you need access to some of your money before the certificates mature, you can withdraw a shorter-term certificate to access the funds. Note, there may be a penalty for early withdrawal.
Calculating the Amount to Invest in Each Certificate
To create a successful CD ladder, you'll need to decide how much money you want to invest and then divide that money into equal amounts that you'll use to purchase certificates with different maturity dates. For example, if you have $10,000 to invest, you might purchase four certificates, each worth $2,500, with maturity dates of one, two, three, and four years. It's important to note that when a certificate matures, you'll have to decide whether to withdraw the money or reinvest it in another certificate. If you choose to reinvest it, you can either add to your existing ladder or create a new ladder with longer maturity dates.
Calculating the Return Rate
Once you’ve calculated the total amount of money you’ll be investing in your CD ladder, it’s time to calculate the return rate. You’ll need to determine the average interest rate for your entire ladder. To do this, add up the interest rates of each of your certificates and divide by the total number of certificates. That number is your average rate of return. For example, if you have three certificates with rates of 2%, 3%, and 4%, your average rate of return would be 3%. Keep in mind that the interest rates of your certificates can change over time, so it’s important to keep an eye on them and make any adjustments as needed.
In conclusion, CD laddering is a great way to earn higher interest rates on your savings while still having access to your money. By investing in a series of certificates with different maturity dates, you can take advantage of the benefits of both short-term and long-term savings. Just be sure to research the best certificate rates and terms before making your investments, and keep in mind that you'll need to reinvest your money when a certificate matures in order to keep your ladder running.
Interested in learning more about CD laddering? Reach out to Service Plus Credit Union today! As a full-service financial institution, we can help you with all your financial needs. Check us out online and contact us with any questions you may have.
Categories: Financial Smarties