Let’s face it, low interest rates are GREAT! – when you have loans. But, what about those who don’t have any loans? If you’re CD investor, then low interest rates are not what you want to hear. So, why do you invest in CD’s? Well, they’re secure, you won’t lose your investment, you can use the interest to supplement your income and you can get your hands on your money if you need it (although penalties can apply). So with all those positives, let’s work on earning you more without jeopardizing your investment. One way to increase what you earn, is to use a CD ladder.
A CD ladder is an investment strategy where you buy several CDs that mature over different maturity times. By using a CD ladder, you make sure that money is available periodically, and increase the yield on your overall CD’s. You’ve always heard the saying, “don’t put all your eggs in one basket”, so why treat your CD’s the same way?
For example, if you invest $100,000 in a 12 month CD earning 0.85%, your yield is just that, 0.85%. If you ladder your CD’s and split your money into 5 chunks and invest $20,000 for 1 year, 2 years, 3 years, 4 years and 5 years you can take advantage of the higher yields that the longer term CD’s offer, yet still have money available each year that you can reinvest or use the cash as you need.
In our example, let’s say the 1 year CD earns 0.85%; 2 year CD earns 1.25%; 3 year CD earns 1.50%; 4 year CD earns 1.75% and 5 year CD earns 2.00%. The average yield on your $100,000 investment jumps to 1.47%. That’s a 73% increase in the yield versus investing everything in the 1 year CD at 0.85%. Then, when money comes due, invest it back in the 5 year CD and the process will continue to earn you higher yields.
Set up your CD ladder with your CD’s spread out by 1 year or maybe try a 6 month gap between them. In either way, you’ll increase what you earn on your CD’s. Now, this strategy only works if you stay committed over time and as interest rates rise, you’ll get to reinvest in those higher rates each year. It’s a proven strategy that will make those low rates not seem quite so low.
Rates in this article are for illustrative purposes only. For actual rates available today, please contact a Personal Banker. Actual results may vary. If you would like us to watch rates for you, please sign up for our Rate Watch program!