Many people tend to forget that things like savings accounts, money market accounts and CDs are investments. Because the return doesn´t have the same potential as other investments do, many people tend to overlook these cash investments. However, cash investments are among the safest investments you can make. And one of the most successful is known as CD laddering. This is a great way to maximize a cash investment while retaining a measure of liquidity in your asset management plan.
How CD laddering works
CD laddering works when you start out by putting money into five different CDs for varying lengths of time. As each CD matures, you take that money (principal plus interest) and put it into a new CD — a five-year CD. That way you constantly have CDs in the bank, and they are maturing every year. They grow due to interest, and you have access to them once a year, should something come up.
Say you have $10,000 that you can use for CD laddering purposes. Divide it up into five CDs of $2,000 each. One should be a one-year CD, another a two-year CD, and so on up to the five-year CD. When the one-year CD matures, take the money (and any extra you might be able to spare) and put it into a five-year CD. This means that the new CD will mature six years from when you started. If you follow this cash investment plan each year, you can ladder your CDs indefinitely, until you have significant cash build-up.
Advantages of CD laddering
CD laddering carries with it some significant advantages. CDs are among the better performing cash investments. And, in these times, the higher interest rates actually benefit cash investments such as CDs. Depending upon the length of the CD, and rates offered at the time you put your money in, you earn a respectable return. CDs are almost entirely risk-free. You can usually lock in an interest rate at the beginning of the CD, and so it remains the same throughout the term. And, you never lose money on a CD. Having it through a federally insured bank further protects your cash investment.
Additionally, CDs done in this way are fairly liquid. Once a year, at the same time each year, a CD will mature. If you need a portion of the funds, you know when you will have access to them. While it would be nice to wait until you retire, or reach some goal, sometimes it just isn´t possible. If you need $700 extra, you can take it from the CD that matures and put the remaining money in the five-year CD. The key, though, is to make sure you continue the cycle so that you are constantly reaping the benefits of a yield.
CD laddering should not be your only investment
As with all elements of financial planning, CD laddering should not be your only attempt at investment. You should have a retirement investment account, either provided through your workplace or acquired on your own. A regular savings account should also be a part of your financial planning. An online savings account or a money market savings account will yield better returns than a more traditional savings account, so consider those. A varied asset management plan with room for a variety of options is the best way to build wealth and plan for the future.