The Best Kept Secret in Savings – The CD Ladder


How do you strike a balance between investing some money at a good interest rate with low risk, and not tieing up all of your funds for a long term? That’s where CD laddering can help.



So you’d like to invest some money at a good interest rate with low risk, and you don’t want to tie up all of your funds for a long term. Unfortunately, it’s the longer-term investments that tend to pay higher rates. How do you strike a balance? That’s where CD laddering can help.

Why CDs?

Rabobank CDs (or certificates of deposit) are insured by the FDIC and backed by the strength of the Rabobank Group, making them one of the safest investment products available. In addition, you’re guaranteed to earn a set interest rate with a CD — typically more than you’d get in a basic savings account — as long as you leave your money in for the full term. (Early withdrawals are subject to penalties.) 

CDs are versatile, too, since they’re available in a variety of terms, from just 30 days up to five years. Longer terms typically have higher yields. Once the term is up and your CD matures, you can withdraw the funds, reinvest them or do both.

Where does the “ladder” come in?

Basically, a CD ladder means that rather than investing your money in a single CD, you split it up among several CDs with different maturity dates. For example, imagine you have $15,000 to invest. Here’s one way you could create a CD ladder:

CD Term

1 year

2 years

3 years

4 years

5 years

Initial Investment

$3,000

$3,000

$3,000

$3,000

$3,000

End of Year 1

$0
Rolled into new 5-year CD

$3,000

$3,000

$3,000

2 CDs of $3,000 each; $6,000 total, plus interest, if reinvested

End of Year 2

$0

$0
Rolled into new 5-year CD

$3,000

$3,000

3 CDs of $3,000 each; $9,000 total, plus interest, if reinvested

End of Year 3

$0

$0

$0
Rolled into new 5-year CD

$3,000

4 CDs of $3,000 each; $12,000 total, plus interest, if reinvested

End of Year 4

$0

$0

$0

$0
Rolled into new 5-year CD

5 CDs of $3,000 each; $15,000 total, plus interest, if reinvested

                                                                         

At the end of year five, your original 5-year CD would mature, and you could roll that into a new 5-year CD. At the end of each subsequent year, another 5-year CD would mature. Throughout the process, each time a CD matures, you can withdraw earnings, without penalty, or reinvest your initial amount plus earnings into the new CD. 

In essence, you enjoy the higher rates of the longer-term CDs (except temporarily during your “start up” years), with the liquidity of a short-term CD. And you’ll generally earn more over the long run than if you invested the full sum into just one CD. 

Depending on how often you want access to your funds, you can create ladders with CDs maturing as often as once a month.

Other options?

Of course, a CD ladder is just one choice when it comes to investing your money. For instance, money markets or savings accounts have relatively low risk and are liquid. Your Rabobank representative would be happy to help you learn more about CD ladders and other solutions to meet your personal investment goals.

Call (888) 945-6600, open a Personal CD online or visit your local Rabobank.





The information contained in this article is intended for general educational purposes only and is not to be construed as legal, tax, or financial advice. Please consult with your own legal, tax or financial advisor for guidance with your own particular circumstances.