Could someone explain Laddering Certificates of Deposit (CDs)? I heard a little about it on talk radio but didn't catch the whole conversation.
Thanks, Ellen from NY
Laddering of Cerificates of Deposit (or laddering of bonds) is the use of various dates of maturities; for example: if you have $6000 to invest ,you would invest $1ooo each month in a 6 month Certificate of Deposit . After you have invested the entire $6000 ($1000 each month for six months), you then will have a Certificate that 'matures' each month and it can be 'rolled over' into a new Certificate or you can 'take the cash' (plus interest) if you need the money that month. By laddering, you don't have to wait four, five, or six months to get your money if a cash problem comes up suddenly one month! If you have to cash in a Cerificate 'early' there would be a financial penalty assigned to your Certificate.
Another advantage of spreading your investments over time, especially when rates are changing, is that they often get differing interest rates. Hopefully rates are going up, so investments will get more interest rather than if you'd invested it all at one time at a lower rate.
Laddering is usually done over a span of one year.If you have $6,000 to invest you buy a CD every other month.When they come due you would have the option of taking the money or reinvest every other month vs putting $6,000 in the first 6 months and have no CD due for the other 6 months.
A good place to study "laddering" is www.bankrate.com - they have some great articles, and you can get the best rates across the country when you are ready to actually invest! Good luck, slw (06/14/2006)
Remember that long term rates are going to be higher than short term, and that rates vary over time; going up AND down according to market forces and the current posture of the Fed. If you have an amount to invest, split it into five parts and open CD's which mature in 1,2,3,4, and five years. As each CD matures, get a new CD with the proceeds with a five year maturity, after all your initial CDs have matured you will have a five year CD "ladder" with five different CDs. This ensures that you will not have your entire investment in a low rate CD. Even if a CD matures and is reinvested at somewhat lowered interest rates in a given year, others mature in different years and hopefully gain higher interest rates when they are reinvested. You also have a yearly access to your money without any withdrawal penalties. There's lots of banks that will open CDs via the Interent, and for the top interest rates, I think MoneyRates is the most consistent site to find them (http://www.money-rates.com/cdrates.htm). ING (http://home.ingdirect.com/), which generally pays decent interest rates, will create such a ladder for you at one shot. They do most of their business via the web. Keep in mind though, ANY banker would happily set up a ladder such as this if the amount of investment is reasonable. Ing just makes it very easy once you have an account with them. It's keeping your eggs in different baskets! (06/14/2006)
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