CDs are some of the safest investments available on the market today. Unfortunately, few people really understand how to best use this investment to gain the maximum possible return from their savings.
CDs are typically purchased through a bank. The money used to purchase the CD earns interest at a rate set by the bank until it matures. The interest rate and length of time until your CD matures are set by the bank. Withdrawing money before the CD matures usually means having to pay a penalty fee and losing any interest that has accrued.
Of course, the best way to get the maximum return on an investment is to find the CD with the highest interest rate. Unfortunately, the best CD interest rates are on products with long periods of time until maturity. While some people may be in a position to agree to a term as long as seven or ten years, most people are not.
Fortunately, there is a way to take advantage of these higher interest rates without tying up all of your money for such a long period of time. Laddering or stacking CDs is a great way to gain periodic access to your money while still taking advantage of high interest rates.
In order to use this method, start by dividing the money you wish to invest into several small groups. In general, you will want as many groups as there are years in the CD term. For example, if you want to invest in a seven year CD, divide your money into seven equal groups. Immediately buy a seven year CD with the first amount of money. Place the other money into a savings account or one year CDs.
CD Laddering Process
In one year, buy another seven year CD with the next group of money. Roll over the other groups into more one year CDs, or keep it in the savings account. At this point, you will have one CD that will mature in six years, another CD that will mature in seven years, and five CDs that will mature in one year.
Keep repeating this procedure every year until each group of money has been invested into a seven year CD. At the end of seven years, you will have a CD that matures once a year. This gives you access to some of the money if it is needed, but still allows you to take advantage of the higher interest rates.