How to Build a CD Ladder

Investing can be a very intimidating field for a beginning. However there are many different types of low risk investing that are great for beginners. One of the best ways is investing in Certificates of Deposit.

Certificates of Deposit, or CDs, can be a great way to invest money without a long commitment. You are allowing the bank to use your money for a specified amount of time and in return you get paid a certain percent of interest on that amount. In most cases they do not require a large sum to begin them and are very, very low risk. However the shorter term CDs tend to have the not-so-great rates at maybe 1% interest. And what if something drastic happens and you need your money immediately? Well you will be punished for taking the money out early. So a financial trick to try is a CD Ladder. How do I start a CD ladder? Let me explain.

A CD ladder is a series of CDs with terms of varying length. Say for example you put $1000 in 5 CDs: 1 year, 2 year, 3 year, 4 year and 5 year terms. As one CD's term expires, put that money into a new 5 year CD. So in other words, in 5 years, all your money will be in 5 year terms with 1 CD up for renewal every year. This is good for several reasons. One is that if something happens that you need your money immediately, then not all of your money is tied up for long periods of time. Don't want to start with 1 year terms? That is okay too. Many banks offer CD term as short as 3 months so you can start a CD ladder very small with very little investment.

Another reason is that CD rates change. If the rates drop, then you can hold on to your money until the rates go back up before you reinvest in a new CD term. If the rates go up, then you can reinvest in the better rates.Currently, CD rates are not stellar, with maybe a 3-4% interest gain on the much longer CD terms. However, if you shop around and are comfortable with investing in CDs that are NOT at your local bank, then you may have an easy money making venture in starting a CD ladder.