|
There is a particular investment strategy used to maximize your return when investing in certificates of deposit. CD Laddering is a strategy that makes it possible to earn a higher overall yield on your certificate of deposit investment. Usually longer term CD rates are higher than shorter term CD rates. If you lock your funds into long term CDs you won't have access to your money. Yes, you can withdrawal your money before the CD terms ends but you will pay an early withdrawal penalty. The penalty can be a portion or all of your interest earn on the CD. When you invest in a CD ladder all of your money in the end is deposited into longer term certificate of deposit accounts but you have access to your money on a regular basis. This is what makes laddering more appealing than investing all your money into a longer term CD like a 5 year term certificate of deposit. Bank CD rates usually rise when the economy is strong, inflation is ticking up and to make sure inflation doesn't get to high the Federal Reserve raises interest rates. The two rates the Fed controls to help them achieve their mandate is the Federal Feds Rate and the Discount Rate. Certificate of deposit laddering can be complex if you don't understand the process I have a simple example how a CD ladder works. In this example we will assume the investor has $15,000 to invest. We will also use three year terms in this example. The good thing is you can take this and apply it any CD terms or deposit amounts. To start you deposit $5,000 in a 3 year CD, $5,000 in a 2 year CD and $5,000 in a 1 year CD. After the first year ends the 1 year CD matures, you than take the original principal and invest the money into another 3 year CD. After the second year, the 2 year CD matures, you take the money and invest in another 3 year CD. After the first two years are over you will have a CD mature every year. Yes, you did when you started this but now a 3 year CD matures every year. All your money is in 3 year CDs but you have a CD maturing every year, how cool is that? If you don't use a ladder you will have to put all $15,000 into one 3 year certificate of deposit. Yes, you will get the same bank interest rate but you won't have access to your money for 3 years. Yes you can take your money out but you'll end up paying an early withdrawal penalty. Plus, your money is locked in while interest rates are increasing. You miss out on getting a higher return. To find the best CD rates just search online, there are many websites that offer and review bank certificates of deposit. While some sites are better than other sites we like the sites that offer interest rate lists so you can easily compare rates.
Search for Bank CD Rates by using our rate lists at CDRates.RatesORama.com
|
