Ladder Your CDs

Choosing the term of a Certificate of Deposit (CD) is an important decision. Longer term CDs usually provide the higher returns, but they also tie up your funds longer. Shorter terms provide more liquidity and the flexibility to take advantage of rising rates, but  usually with lower returns. Ideally, you would want the highest current return coupled with liquidity and the ability to invest at higher rates if interest rates rise.

Building a "ladder" is a way to create a "portfolio" of CDs that enables you to earn good rates, have some liquidity and be able to lock in higher rates if interest rates rise. Simply stated, with this strategy, you divide your funds into pieces and buy equal amounts of different term CDs. Here is an example:

Let's assume you have $25,000 and want to buy CDs with terms up to five years. The rates on certificates are:

1 year 0.60% APY*
2 year 1.70% APY*
3 year 2.15% APY*
4 year 2.50% APY*
5 year 2.95% APY*

By making initial purchases of $5,000 each of the different terms, your average Annual Percentage Yield would be about 1.95%. Each year, as a CD matures, you use the proceeds to buy a new five-year CD. That way, as time goes on, more and more of your funds would be earning the highest rate and you would still have annual liquidity. If rates rise, you have liquidity to buy higher yielding certificates. If rates fall, you are still earning high rates on your existing positions.

No one can accurately predict the future of interest rates. Using this "ladder" strategy can help position you to benefit regardless of the direction of interest rate changes.

Contact a Starion Financial personal banker for rates, terms, or to build your own "CD ladder."

Visit our personal savings page for more information.

*Annual Percentage Yield. For Illustrative purposes only as of 10/1/2010.