CD Ladders, Remember Those?

Rewind about 15 years ago and you will likely find yourself in hay day of interest income. This was the dawn of online banks, no brick and mortar needed. These banks were offering in some instances 8-10 percent in interest for savings accounts and even higher for CD's. These rates are unheard of today and I should remind you these rates increased until everything fell apart in 2008. One of the tried and true "safe" investments was to build a CD ladder.

What is a CD Ladder?

A CD ladder was a way to maximize interest income by deploying your savings into multiple CD's with various and ulternating maturity dates. An example of this is if you have $10,000 that you wanted to invest in CD's. The 3-6 month rates were 3-4% but the 2 year rates w

ere close to 10%. The idea would be to place $2,000 in a 6 month CD, another $2,000 in a one year CD, 3,000 in a 18 month CD and the last $3,000 in a 2 year CD. As each CD matures you would simply evaluate if you wanted to reinvest in a new CD (a 2 year CD most likely) or use the funds for something else. The alternating maturity dates resemble a climbing of ladder rungs and allows the investor to maintain a semi liquid position with very little to no risk. It was a great investment strategy while rates were unbelievably high. Fast forward 10 years later when CD rates are about 1-2 percent. Not worth the effort.

Are CD's on a comeback?

CD's haven't made it back to the mark they were, which is a good thing in my opinion, but they are getting to a 2.5-5 percent range which in an economy where stocks are volatile and perception rules all monetary decisions it might be the time to pull some cash and stay safe for a bit. Cash is king in down turns and if you create a CD ladder now you can earn some steady cash while you wait to jump back in the game.