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Personal Finance and Investing : How to start a CD Ladder

Updated on September 4, 2011
A CD Ladder is much like a regular ladder.
A CD Ladder is much like a regular ladder.

I've seen some interest on how to use CD's and with all the fear with interest rates, I thought this will help people out.

When choosing a CD, look at the fine print. Some CD's will charge a penalty if you need to withdraw ANY part of the principal or interest prior to the maturation date. Normally, when you go with a longer CD, it's a higher penalty. So, if it's a five year CD it may be 6 months interest forfeited, and they calculate the interest by using what the last (highest) six months would pay in interest.

I like Ally Bank, because they offer higher rates and allow for 'no penalty' CD's. Meaning you can break the terms without paying any penalty at any point. I also like that they don't have a minimum. So if you were super worried about the interest rates in the future and you wanted to maximize return, while minimizing risk that rates will go up. You can get a ladder going very easily without a ton of money.

An example of a typical CD ladder would be, 5 CD's of equal amount. To start, you'd open a 12 mo. CD, a 24 mo. CD, a 36 Mo. CD, a 48 mo. CD and a 60 mo CD. Once each matures, you roll it over into a 60 mo. CD. That way in five years you'll have five 60 mo. CD's maturing once a year for five years. You'll be averaging the interest rates, but also it will help weather the ups and downs they have been doing recently.

You can change the terms as well, doing the same with 6 CD's for a 3 year period (6mo, 12mo, 18mo, 24mo, 30mo, 36mo.). It's extremely variable and can be tailored to any person's needs. You could even do the same with 60 CD's over a five year period (opening one a month for 60 months, or 60 all at once with a month variance). The more CD's you open and the more frequently you space them, the more you're going to 'trail' the interest climate.

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