Knowing how to create a CD ladder and manage it proper takes a little time but it is a wise long term investment strategy for the conservative investor.
To start a CD ladder the investor must first look for the best possible overall CD rates that are being offered. The rates do not all have to be with the same financial institution. The object is to get the highest possible return on CD’s that are at different maturity terms. The 3 rung ladders as well as 5 rung ladders are the most common but you can have as many as 9 rungs if you have the money to make the investment.
An example of a 3 rung ladder would be one CD with a one year term, the second at a 2 to 3 year term and the third being a 3 year to 5 year term. Ideally you would want to have a CD maturing each year. This way after one year has passed the 1 year is ready for reinvestment, the 2 year has one year left until it is mature and the 3 year is now a 2 year CD. The advantage to this is that with different maturity terms, money will be accessible each and every year without an early withdraw penalty if it is needed for purposes other than investing.
Another key advantage to a CD ladder is that with the maturing of a CD every year, if the rates on CD’s increase, you do not have that long to get a piece of the action.
The key is to know the maturity dates of your CD’s and do not allow them to automatically roll over. This is generally done and the money is reinvested at the same maturity as it was set originally. The key is to locate the best bank CD rates each year and make the investment with them. This is How to create a CD ladder and make it work for you.