How to be a Saver in Times of Rising Interest RatesMay 15, 2017 in Monday on the Money
Interest rates are starting to rise and are likely to head even higher, which means it’s time to build a ladder so you can climb with them. A ladder? you ask. I’m talking about a Certificate of Deposit (CD) ladder.
If you’re not familiar with the term, I don’t blame you. It’s been so long since CD laddering was financially relevant that the last time I saw the term in print, the financial magazine had “housing bubble bursts” bold across its cover. But rising rates brings new dilemmas for savers, and a CD ladder is an old-school way to ensure you don’t miss out on interest income.
Here’s how it works: Since you are typically paid a higher yield for longer-term CDs, but longer term CDs may cause you to miss out on rising rates, a CD ladder finds a happy medium between the two. With a CD ladder, you buy smaller CDs that mature at staggered dates. I like to keep things simple, so here’s how I create a CD ladder: Split the funds I wish to invest 5 ways, and then put equal amounts into 12-month, 24-month, 36-month, 48-month, and 60-month CDs. When each CD matures, I reinvest it into a 60-month CD. Now, there is one CD maturing each year and the funds invested are able to climb with the interest rates.
By Adam Lucas Adam Lucas holds a Finance degree and an MBA from the University of Kentucky. His work has appeared in many major outlets including Yahoo, AARP.org, and GoBankingRates.com
Monday on the Money is a weekly commentary from Bank of the Ozarks providing financial advice and solutions important to you and your family.