Forget ordinary money market investments now. Think big and get real, for, Certificates of Deposits (CDs) is one surefire way to help your funds grow and earn high interest rates. However, there is one condition to having CDs. Your money is locked for a specific term and does not stay liquid anymore. This term generally ranges between one month and five years. If you withdraw money before its maturity, you lose a good deal of interest as a penalty.
CDs offer some of the best interest rates, but the funny thing about these is that you will never be able to predict the peaks or troughs. Trying to predict the future path of interest rates is not just an impossibility, but also silly. No matter how much facts and figures you have at your disposal, you will never know for sure! So why get into foretelling? Instead, take recourse to the ladder strategy in CD investment.
What’s that? The obvious question.
Bankers today don’t just rely on good banks to get good returns on their investments. Most are now turning to the laddering strategy. This gives some of the highest interest rates and you’ll soon know why.
It’s simple. Suppose you have $50,000 to invest. Normally one would think of putting the entire money into one CD. But in that case you run the risk of having no money at some emergency. You will be forced to go against rules, withdraw money and pay a penalty. Now the ladder method would recommend the same amount to be invested into five smaller CDs of $10,000 each with staggered maturity dates. Say the first CD of $10,000 has a one-year term, the second a two-year, the third a three-year and so on. This way you have one CD to mature at the end of each year for five years; and you can take proceeds from one that matures to invest on another five-rung ladder like the one you already have. Every year you repeat the process and what you ultimately get is a steady availability of money, along with good interests.
One advantage of strategic laddering is that all risks of betting huge CD money on dicey predictions are eliminated. Another advantage is that you always have some CD money to meet emergency needs. Also, you are almost always assured of the highest CD rates while laddering. Simply because, if you have invested on CDs with banks or other institutions that pay higher rates than their competitors, a continuous ladder would obviously mean more and more money.
But ensure that the maturities are in accordance with your cash budget. It’s not a good idea to start laddering without assessing your financial situation. In that case you would only end up meeting a dire money crunch and being hesitant to withdraw your locked investment. So, think, assess, plan and then enjoy the benefits of laddering.
By: Wain Roy