Why a CD Ladder Can Help You Find The Best CD Rates

Article Written By: Hank Coleman

Interest rates on savings accounts, money market funds, and certificates of deposits have been at their lowest levels in years. The problem is that no one knows exactly when interest rates will rise. It could be tomorrow or it could be years from now. But, what should an enterprising investor with money to invest do with the cash that they have sitting on the sidelines not earning interest? One way to guarantee the best rates is to create a CD ladder.

Let's say a one year Certificate of Deposit earns a 1.34% annual interest rate. But for the pleasure of locking your money up for 5 years, you could earn 1.23% more than a 1 year (2.57% annually over five years). The National Average for a five year Certificate of Deposit (as of the date this article was published) is only 1.47% annually. That is not a lot of extra interest for the privilege of locking your money away for four extra years.

If interest rates rise sooner rather than later, you would not want to be locked into a long term agreement with a bank earning low interest rates when rates are rising. One of the greatest ways to earn the best CD rates is through a CD ladder which does not tie up all your money when rates start to rise.

A CD ladder is a great way to hedge your bets against rising interest rates. It is a version of dollar cost averaging but with Certificates of Deposit. You build it by investing your money in CDs with staggered maturation dates. Initially, you should spread your investment evenly out across several CDs of varying maturity, for example a one year, two year, three year, four year, and five year Certificates of Deposit.

As each one year CD matures, you would immediately reinvest your money into the largest term in your "ladder" - in this example a five year CD. This will help ensure that you will continue to earn as those rates increase for the longer maturity date CDs. This keeps one year separating all of your Certificates of Deposit like the rungs of a ladder.

Thanks to the internet, investors have an incredibly huge selection of banks to choose from. Many do not have a brick and mortar branch to visit, but that doesn't matter if you are after the best CD rates. Because banks are competing for your business, the investor should shop around for the very best interest rates. Because of this competition, investors see interest rates creeping up and can except this trend to continue.

Most banks are now offering Certificates of Deposit that you can invest in solely online with terms that range from three months to ten years. For the investor who is looking for a little more interest on his or her money, CDs offer guaranteed returns at competitive rates thanks to online banking.

About the Author

Hank Coleman - learn how to find the best CD rates and information at http://www.discoverbank.com

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This Article Has Been Published on Thu, 27 Jan 2011 and Read 197 Times

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