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Make the Most of your CDs with Laddering

Certificates of deposit are known to have the highest rates of insured savings accounts. They allow you to put money away for the future without risking a loss from a market crash. Most people just put money in a CD and leave it until it matures, but there are better ways to make use of your CDs. Staggering or “laddering” your CDs maturity dates allows you to set up a schedule of consistent payouts.

In order to begin a CD laddering strategy, you must have some money to invest. You will have to spread your money across several accounts. CDs require that you invest a minimal amount to reap the benefits of the higher interest rates.  Our lowest CD requires a $500 minimum deposit. That account only returns a maximum .35% interest rate. You won’t reap the same benefit as you would from a $1,000 CD with a maximum interest rate of 1.3%.DollarJar_blog

Some consider this a drawback but a benefit of CD laddering is the withdrawal penalty. Most CDs won’t allow you to withdraw early without losing all of the interest earned. These penalties act as a strong deterrent for spending your money and reward those for their patience.

How does it actually work? Here is an example:

You invest $5,000 into 5 CDs that will mature every quarter for the next year. You put $1,000 into a CD with a maturity term of 3-5 months. You then place your next $1,000 into a CD with 6-11 months maturity term. You continue with the next three in the same manner. $1k into 12-17 months, $1k into an 18-23 months and finally your last $1k into a 24-35 month CD.

This method will pay you each quarter with an increasing interest rate. After 3 months, you’ll be able to take out the interest from your first CD without any penalty. The second will mature after 6 months, the third after 12 months, and the others will follow at regular intervals.

As you can see, a small initial investment doesn’t yield much return. However, it’s still a steady return with a much higher interest rate than any savings account out there, and it consistently pays out.

What is your preferred method of saving? Let us know in the comments below. 

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