Striking a balance between having investments that provide solid returns while still having financial flexibility can be a challenge. But an approach called CD laddering can help you maintain that balancing act.
First, a little refresher about CDs, or certificates of deposit. A CD is also known as a “time deposit” or a “term deposit” because it’s set for a certain period of time. The depositor can choose which term they want to go into. CDs are a great way to earn a competitive interest rate and not have to think about setting money aside on a weekly or monthly basis like you would with a savings account.
Essentially, you put your money in the bank and you know that after the period of time your CD is locked into expires, you’ll be able to get your money back with interest that is guaranteed and fixed. There are short-term and long-term CDs available at most banks. Short-term CDs can range from 6 months to a year, while longer terms typically range between 18 months and 5 years.
You can access money in your CDs before they are fully matured, but be prepared to pay a penalty for early withdrawal. But this is where CD laddering can help provide financial flexibility.
CD laddering is a great way to be able to have money tucked away and earning a competitive interest rate, but also have access to the funds at regular intervals. There are a lot of different ways to approach CD laddering, depending on the individual’s investment strategy.
CD laddering involves buying a series of CDs at regular intervals so that they’ll mature at regular intervals as well. So over the course of the CDs’ maturity you have access to funds on an ongoing basis.
For instance, three CDs are opened at different maturity levels – one for 6 months, another for 12 months, and a third for 24 months. When the 6-month CD comes due, you can either cash it out or roll the funds over into another CD.
Using this approach, you regularly have a CD maturing, and its funds becoming available. If you decide you want to only use a portion of the funds once the CD matures, you could take out the interest that you’ve earned and roll over the principal into a new CD.
If you have some CDs that are shorter term with a lower interest rate and some that are longer term with a higher interest rate, you benefit because if you average out all the rates, it’s as if you had a longer term CD all along. That’s why financial experts advise having a mix of both.
Some people have found CD laddering useful as a source for emergency funds. For instance, money set aside for emergencies could be invested in a series of 6-month CDs that are opened once every month over the course of 6 months. When a CD matures, it can either be rolled over into another 6-month CD or cashed out, if necessary, for emergency purposes. Basically this creates a perpetual emergency fund, and the money that’s invested earns a higher interest rate than what would typically be earned in a regular savings account.
Generally speaking, however, CD laddering typically involves rolling over short-term CDs to longer terms at higher interest rates. In the end, you have several CDs with long terms, but they mature at regular intervals, giving you access to funds if you need them.
To learn more about the CDs that are available at Bank5 Connect, go to http://www.bank5connect.com/home/cds. And while CD laddering may fit in nicely with your overall investment strategy, remember that it’s always wise to consult with a tax advisor before making any major financial decisions.