What is a CD Ladder?
The concept of a CD ladder is to help you plan out your CD investments so that you can continuously invest in CDs, maximizing your earnings and still provide some flexibility to your funds as to not constantly lock it down.
I’ve been trying to set up a CD ladder for myself. Interest rates have been in their all time low nowadays, even for CDs and high yield savings, but being that I’m not much an investor myself, I’ll like to take some action to bump up my savings as minimal as it may be.
To truly master the skill of CD laddering, you want to turn your CDs as liquid as possible. The ultimate goal is to have your CDs mature one after another so some of your funds are always available. Picture this: having 60 5-year CDs maturing every month of a 5 year period! But, of course, the average person will not have the funds/time/energy to sign up for 60 CDs, so depending on how large your savings are, you can decide on the interval of maturity whether monthly, quarterly, or annually.
How I Plan My CD Ladder
1. Decide on an maturity interval. You need to consider how often you want to have access to some your money in case you need the extra boost. Whether in the beginning of the year to pay for taxes or at the end of the year to pay for holiday shopping. Ideally you’ll want something to mature like every month, but I thought it’ll make more sense quarterly, I don’t really need it every month.
2. Decide on a “lockable” amount of liquid cash. This amount is what I’m willing to lock away at ANY given point of time. Very scary. But because I’ll have something maturing every quarter, I thought it’ll be good to lock in a 3-month worth of my savings. (This is normally the amount of money that I don’t budget for every month and is not the same as my emergency reserve.)
3. Figure out a strategy. With CD rates so close to high yield savings accounts, I’m looking at the longer term CDs. But I also don’t want to be bounded to a bunch of 5 year CDs when the rate is so low. So I decided to plan out my CD ladder as follows with a mix of 1-year, 2-year and 5-year CDs. With 8 CDs opened at any given time, I can maximize my earnings on 5-year CDs with an added flexibility of 1-year CDs.
Starting off with a 1-year and 5-year CD, I can reinvest/renew the 1-year into another 1-year upon maturity. If the maturity date collides with the 5-year CD, then I’ll reinvest it into a 2-year CD instead. This way I’m guaranteed that one of my 8 CDs will mature every quarter. This plan will work regardless of the maturity interval.
How does this sound? Do you have a CD Ladder plan? Feel free to share your comments!