Hook and Ladder

The CD deal is simple: You lend the bank your money for specific period and get a fixed interest rate. You’re dinged for early withdrawl. Terms range from 30 days to five years or longer. 

Since your interest rate will be fixed, when you’re ready to buy a CD shop around for the best interest rate. Try a resource like www.bankrate.com. You may find rates are considerably higher outside your own state or an online bank registered with the FDIC.

If you decide to invest in more than one CD, take advantage of the technique known as “laddering,” an effective and popular way to even out the peaks and valleys in unpredictable interest rates while making sure penalty-free cash is never far away.

Let’s say you have decided to allocate $25,000 of your investment portfolio to CDs. You buy a $5,000 one-year CD, a $5,000 two-year CD, a $5,000 three-year CD, up to your last $5,000, which buys you a five-year CD. Each of those years represents one rung on your CD ladder.

When your one-year CD matures, you reinvest that money in a five-year CD. From that point on, as each year’s CD matures, you use that money to buy a new five-year CD, thus maintaining the one-year steps in your CD ladder.

With laddering, you don’t have to be an expert, nor do you have to worry about day-to-day fluctuations in interest rates. If you’ve constructed a logical CD ladder, you’ll be in a position to benefit no matter which road the interest rate curve decides to travel.

This technique gives you the security of knowing you will be able to access at least some of your money relatively soon and without penalty while benefiting from advantageous interest rates.

The author is a freelance writer based in Abington, Pa., with 40 years experience in business management and financing.

Open the door to higher rates with brokered CDs. Learn more at www.lawnandlandscape.com/webextras.