Investing in certificates of deposit is a great way to keep your money safe. You can enjoy a decent return on it if you allow it to sit long enough and you don’t have to worry about it losing money. CDs are also easy to obtain through your bank or other financial institution. While investing in one CD has benefits, using a CD laddering system can produce even more benefits. Here are some basics about CD laddering so you can consider doing this with your investing money.
CD laddering is a system in which a person spreads their investment money across several different CDs. Most investors who set up a CD laddering system purchase CD products with a variety of maturity dates. One CD may mature in one year while the second one may not mature for five years and another that matures in 10 years. In this example, the CD that matures in one year would be the first rung of the CD ladder. The five-year CD would be the second rung and so on. With this system, investors continue to build the ladder each time a CD matures.
Once the first “rung” has matured, the investor takes the money out of the CD and reinvests it in another CD which goes to the top of the ladder while the second rung now becomes the first rung. The highest rung now has more money in it since it was building up interest during the year while it was maturing.
One of the main benefits of using a CD laddering system is that you do not have to tie up all of your money into a long-term CD. You can split up your money and have some of it in a shorter term CD so it is not tied up as long. The problem with tying it up into one CD is that you will pay a penalty if you withdraw a portion or all of it early. So if you have a five-year CD, you have to do without that money for five years or else pay a penalty to withdraw. By using a CD laddering system, you can have access to at least some of your money sooner.
Another main benefit of CD laddering is that you can take advantage of better interest rates when they come around. By having more liquid funds available , you can invest money in a CD when the interest rates are good. If the rates drop, you can change your strategy easier without any fees or early withdrawal penalties.
If you have enough money to spread across a few CDs and you want to put it in something secure, consider working on a CD laddering strategy. It doesn’t take any extra money and it’s a great way to keep your money from getting tied up for too long.