Are you thinking of investing in certificates of deposit (CDs)? If you are, there’s a strategy you should try that can help you to make the most of your invested funds. It will also help you minimize the biggest downside of CD investing and maximize the potential for great returns.
Here’s what you should do.
Give this CD investing strategy a try
When you’ve decided you want to buy a CD, you should think about building a CD ladder. To do it, you’ll buy CDs that mature at different times. Each one will make up a rung on your ladder. Here’s one example of how this could work. You could buy the following:
- 1-year CD
- 2-year CD
- 3-year CD
- 4-year CD
- 5-year CD
Each one of those CDs would mature at different times. Once your 1-year CD matures, you could reinvest that in another 5-year CD. You can keep this going indefinitely.
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Why would you want to build a CD ladder?
So, why would you want to follow this strategy? It’s the best approach to CD investing for three big reasons:
- You have a CD maturing regularly. One big disadvantage of CDs is that you lock up your money with them. You can’t take it out before the CD term has ended or you’ll get hit with penalties. With a ladder, you’ll have CDs maturing regularly — so you’ll never have to wait too long to access your money.
- You get the best of both worlds for rates. You get to take advantage of short-term CDs that are offering really great rates right now. While long-term CDs, like 5-year CDs, aren’t paying quite as much as short-term CDs, they’re also still paying competitive rates. You’ll get to lock in at today’s yields for years to come, so if rates fall, you’ll still earn a great return on investment (ROI).
- You minimize interest rate risk. If rates happen to go up, you will have money becoming available pretty soon from your short-term CDs. You can use that money to invest in CDs offering higher yields if they become available. If rates go down, you’ll have locked in some money at the higher current rates.
There’s no real downside to this approach, especially since there are a lot of CDs with low minimum deposit requirements or even no minimum deposit requirement at all. You can build a CD ladder by putting $100 into each of five different CDs if you want.
You can also customize your ladder to your own goals. Want to access your money sooner? Try a ladder that includes a 3-month, 6-month, 9-month, 12-month, and 18-month CD. It’s up to you!
To get started, just check out The Ascent’s guide to the best CD rates. Be sure you can leave your money invested for the duration of the CDs you buy, and shop around for the very best rates you can. You’ll start earning money on your ladder and will be set up with a great investment for months or years to come
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