Building a CD ladder provides access to your money while limiting your exposure to interest rate and inflation changes.
Do you invest in longer-term certificates of deposit to get the highest interest rate, or do you put your money in shorter-term CDs so it is more accessible even if it means settling for a lower interest rate? A strategy called laddering lets you have your cake and eat it too. Laddering a CD is similar to dollar-cost averaging when buying stocks or mutual funds. Managing your cash investments should be part of your overall investment portfolio strategy. The right cash management strategy can provide access to your cash when you need it while achieving higher overall returns.
There are four main reasons to ladder your fixed-income investments:
Obtain higher yields by investing in longer-term fixed-income vehicles
Reduce interest rate risk, market risk, and reinvestment risk
Structure your investments to match your goals
Provide access to principal at regular intervals in case you need the money
A ladder is a series of investments that mature at regular, staggered intervals. For example, you might build a ladder by dividing $10,000 among five CDs such that one CD matures every year for the next five years. Once a year, you have the option of withdrawing some or all of the principal from your savings. However, if you keep the principal in CDs, your ladder is invested eventually ...