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.