If investors are concerned about locking in low interest rates for a long period of time, then they should consider building a certificate of deposit ladder. A CD ladder as it is often called is an excellent investment tool to spread the risk of rising interest rates over several different certificate of deposit maturity dates in order to maximize the interest earned while keeping options open to the investor.
What Is A Certificate Of Deposit Ladder?
Certificate of deposit ladders stagger the maturity dates of CDs in a dollar cost average type of investment. To establish a CD ladder, an investor can open certificates of deposit at varying maturity dates such as six months, one year, two years, three years and five years. As each certificate of deposit matures, the investor will then reinvest the proceeds into a longer maturity. So, for example, as the one year certificate of deposit matures, the investor would purchase a brand new five year CD as all of the other certificates of deposit inch one more year closer to maturity. The investor would then have CDs over each year with one maturing every year resembling the rungs of a ladder, hence the name, CD ladder. Investors can also purchase multiple certificates of deposit in order to have a new CD maturing every month.
Advantages of a CD Ladder
The main advantage of a certificate of deposit ladder is that this type of investment leaves an investor flexible to take advantage of increasing interest rates. With a new CD maturing each year, the investor has new money to continually invest at what should be a higher interest rate in an economy where rates are increasing. This also protects the investor from needlessly locking in too much of his or her investment in long term CDs at low interest rates.
Certificates Of Deposit Are FDIC Insured
Certificates of deposit are insured by the Federal Deposit Insurance Corporation (FDIC). They are insured up to $ 250,000 per account at each financial institution that you bank with. This is a great benefit to investors. They can invest their money in certificates of deposit and CD ladders without the fear of losing their money because of a bank failure.
Certificates of deposit offer investors an excellent alternative to high yield savings accounts. CDs can provide investors with competitive interest rates over multiple maturity dates. And, building a CD ladder offers investors a great option to continue investing while waiting for higher interest rates in the future. CD ladders give an investor the flexibility to take advantage of increasing interest rates over the long term.
Hank Coleman is the founder of several financial blogs, focusing on topics such as how to find the most competitiverates. He is an entrepreneur and professional in the government sector. Hank holds a Bachelor’s degree in Business Administration, a Master’s in Finance, and is currently studying for his Certified Financial Planning (CFP) credentials. Always looking for a trusted financial institution for advice and tips he tends to look up information at more often than not.