How to Ladder CDs: Stagger the Maturities of Multiple CDs for Good Rates and Liquidity

Investors should decide the amount they are willing to invest and allocate it to buy any number of CDs of different maturities on one day or spread the investment out in regular purchases - perhaps every month, every two months, or quarterly. By laddering purchases, the investor will catch some higher CD rates to mix in with the lower ones. CD rates fluctuate often; most change each week. Usually, longer-term CDs have the higher rates.

Examples of How to Ladder

Let's say the investor has $2000 to purchase CDs. She can buy four $500 CDs with maturities of her choosing, perhaps 12 months, 18 months, 24 months, and 30 months on the same day. When the 12-month CD matures, she reinvests the proceeds in a 30-month CD, the longest-term CD from the original investment. (When the initial 12-month CD matures, the 18-month CD will mature in six months, the 24-month in 12 months, and the 30-month in 18 months.)

Or, with the initial $2000, the investor could buy on the same day four $500 CDs maturing in one year, two years, three years, and four years. When the one-year CD matures, buy a four-year CD because by then the original four-year CD will mature in three years. Or, if the investor is a save-as-you-goer, buy one $500 CD monthly, quarterly, semi-annually, or whatever.

Individuals do not need to have a lot of money to ladder CDs. Shop around because there are financial institutions that have a low minimum of $500 to open a CD account.

Added Benefits When Larger Sums Are Invested; Use a Rate Calculator

In truth, laddering CDs with four small investments of $500 (or several thousand dollars) might produce smaller returns than buying a single $2000 CD. However, the object in laddering is not only better returns than savings and checking accounts but CDs maturing at different times to fit the demands of the investor's lifestyle; CD monies are easy to get to (liquid). If the investor redeems at maturity, there is no penalty. If the investor redeems before the maturity of the CD, an early withdrawal penalty is charged.

Of course, those fortunate enough to have $15,000 or so to invest in each CD will reap a greater return on their money. In fact, laddering CDs with larger amounts of money over a period of five years or so will usually be more profitable than buying a one-year CD and reinvesting the original amount every year for five years. Use a CD rate calculator to find out how much a CD will return even before buying it and to learn best how to ladder CDs for optimum returns.

Try to invest in CDs that compound daily rather than monthly, quarterly, semi-annually, or annually because the return will be greater, especially if you have a large investment.