CD Ladders Explained

I have had some friends and family ask me about how a CD ladder works. I am currently holding one with part of my emergency fund. They are a great investment tool to utilize to keep your average interest rate up over the years. You won't always get the best rate but you will consistently get a good rate.

Here is an example that I started back in September of 2008 with ING Direct. They actually have the ability to create a ladder on their site and you can pick the maturities. It is very easy to use and great for someone starting out. Always check rates at other banks as convenience usually costs you in the form of lower rates. They were the best rates I could find at the time for the amount I could invest.

1 year @ 4.00%
2 years @ 4.00%
3 years @ 4.00%
4 years @ 4.00%
5 years @ 4.25%

These are very good rates that I locked in before they dropped off. Normally you would roll each maturing CD into another 5 year CD (which typically has higher rates than the shorter terms). This, in turn, means you maintain a good rate over the long haul. After the 5th year you will be holding all 5 year CD's with each maturing every year in turn.

My one year is maturing on September 8th of this year and they are offering 1.65%. That is barely more than my current savings rate so I will move it over my savings until rates rise. If rates were better I would have rolled into another 5 year CD. I do admit that I am a bit of an interest rate chaser and want better than a "good" return.

I am using part of my emergency fund to invest in this ladder as I am banking on not needing it in the near future. One must be careful here as the penalties for early withdrawal can be steep! My current ING CD's would cost 3 months interest to take out early except for the 5 year which would take 6 months. This can really add up on a large amount of money and you can actually take a loss if you withdraw quickly after openeing.