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Certificates of Deposit have long been a place for people to park their funds for set period of times. In fact, in the recent downturn since 2000, CDs have been growing in popularity because, in most cases, deposits are backed by the FDIC and the reserves of the financial institution that issues them.

But in recent months, CD rates have plummeted. According to, average CD rates dropped to just 1.72% for a 12 month CD (April 21, 2003). Several analysts have publicly wondered if CD rates can go much lower, given market conditions and the current state of mortgage rates, which often indirectly impact CD offering rates. And if interest rates climb, an individual could miss out if they are locked into a longer term CD to maximize returns.

How can you take advantage of CD yields, while still participating in an interest rate upswing? That’s where the CD Ladder Strategy can come into play.

With a CD Ladder Strategy, you don’t just purchase a single CD for a set amount of time. Instead, you “ladder” your money over different maturities. By purchasing shorter- and longer-term CDs, you spread out any interest rate risk. You don’t earn as much as you would by locking in for the long-term, but you are able to take advantage of the market should interest rates rise in the interim.

Suppose you have $100,000 to deposit, and are looking at a 5 year time horizon. By employing the CD Ladder Strategy, instead of locking your money in for 5 years, you would spread that around shorter maturities. So you might buy:

  1. A $20,000 1-Year CD;
  2. A $20,000 2-Year CD;
  3. A $20,000 3-Year CD;
  4. A $20,000 4-Year CD; and
  5. A $20,000 5 Year CD.

The idea is to "ladder" your money among different maturities, to take advantage of changing interest rates in the future.

As each CD comes up for renewal, you purchase a new 5 Year CD, locking in the best interest rate at the time. You’re always assured the best rate of return, while having access to funds every year when the next CD matures.

Imagine that twelve months have passed, and your first $20,000 CD is up for renewal. If interest rates have gone up, you can roll that money into a brand new 5 year CD, locking in a better rate. If interest rates have slipped, that’s alright, since 80% of your money was locked in when rates were higher. Stick with the strategy, and lock in a new 5 Year CD. Overall, you’ll get a better rate of return, and you’ll have another CD coming due every 12 months. As people in this volatile environment have realized, ANYTHING can happen in 12 months.

Make sure your bases are covered, and your interest rate risk is minimal by employing the CD Ladder Strategy. You’ll achieve better rates of return, and be able to weather any interest rate changes.

To learn more about CDs and begin your own CD Ladder, please visit the Banking Center or contact a SaveWealth Advisor.

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