Ladder Your Certificates of Deposit

When you buy a certificate of deposit (CD), you need to consider the future direction of interest rates. If you believe interest rates will fall, you would purchase a multi-year CD such as five years to lock in the current high rates. If you think rates will rise, you would buy a shorter duration CD, let it mature and then buy a CD with a higher rate.

Of course most of us have a difficult time predicting interest rates so a more conservative approach is to buy CDs with different maturity dates. This approach is called laddering. For example, with $10,000 to invest you could buy five $2,000 CDs, with the first CD having a one-year maturity and the last one having a five-year maturity. Each year you would roll over the maturing CD to a new five-year CD. The net effect is that you would receive the average of fluctuating interest rate over a period of years

See bankrate.com for more about laddering your CDs.

Posted November 12, 2006.