LADDERING CDS

[Anonymous]

Does anyone know how this works?  My

bank says they don't do it.

[Lel]

You don't need a bank to do it for you.  You can do it yourself.

The basic idea behind laddering is to lock in better interest rates without commiting all of your funds to a single long-term CD.  It takes some time - sometimes a few years - for the laddering effect to be fully realized.

Basically, you could do the following.  All interest rates are purely hypothetical and do not represent the market rates at all.  I haven't even checked the rates.  They are there solely for illustration purposes:

Invest $100 in a 1 year CD @ 1.25%

Invest $100 in a 2 year CD @ 1.50%

Invest $100 in a 3 year CD @ 1.75%

Invest $100 in a 4 year CD @ 2.00%

Invest $100 in a 5 year CD @ 2.25%

After 1 year, the 1 year CD will mature.  You take that and reinvest in a 5 year CD at the higher interest rate.  After the second year, the 2 year CD will mature.  Reinvest that in a 5 year CD, also.  Keep doing the same thing with each CD, until you are investing in a new 5 year CD every year.

This accomplishes two things: (1) it eventually allows you to have all your returns at the higher, long-term CD rates, and (2) it doesn't tie up your savings for a long period of time.  Some of it becomes available, penalty-free, every year.

The drawback to this approach, given current economic conditions, is that the interest rates on even long-term CDs are at historical lows.  Eventually, as the worldwide economy continues its recovery, interest rates and inflation will rise.  Thus, in a couple years the return on your 5 year CD might be lower than that of a new 1 year CD - and may lag behind the rate of inflation - but you'd be locked into the lower interest rate.  But since you'll have a portion of your CD holdings maturing every year, you'd be able to reinvest at the higher interest rate in the longer-term product.

Be also aware that many banks will automatically roll your CD over into a new CD at maturity, unless you actively do something about it.  So, if your 1 year CD matures and you forget to put it into a 5 year CD, it will roll into another 1 year CD at a lower interest rate.  But once you have your 5 year CD ladder completely established, then rolling over to a new 5 year is exactly what you want to happen.

[haulingthescoreup]

You can also do this with your savings/ emergency funds, that we all have (yeah, right!) for sudden economic disasters. Buy a 6-month or 9-month or 12-month CD, however many months' worth of savings you have, investing a month's worth of money. Buy a new one every month until all your money is in CD's. As each one matures, roll it over again for that same term.

The idea is that if you lose your job and need to live off your savings, you'll have enough in CD's maturing each month to give you income that month, but you'll be getting somewhat better interest than the currently pitiful money market rates, and since one or more CD's will mature each month, you won't have to cash in early and pay the penalties.

It's a different goal and different technique that the one Lel describes for long-term savings, but a similar basic idea. I had actually read about laddering emergency savings before hearing about laddering long-term savings, and they both make sense for those with a decent amount of case who'd like to get some semblance of interest income. Or at least beat inflation!

[Anonymous]

I want to roll over my 401K and ladder it.  The girl at bank

never heard of laddering.  She says I have to put in one CD.

I guess I'll have to go there and find someone who is in the know..

The rates have gone down again to practically nothing.

Thanks alot for your help.

I had a stroke so had to quit my job.  My 401k is still at

where I worked.