CD(Certificate of Deposit) laddering is when you open multiple CDs at once, but have them end at different times. The time frame may be 6 months, 1 year, 2.5 years and 5 years. This allows you to take advantage of the good rates whenever they come by. Today, CD rates are not the best. Another advantage, is it will allow you to receive money every few months, in case you are running low.
This can also be used to prevent yourself from spending money. If you take money out earlier than planned you will be fined. This can teach people the practice of waiting, which is important for investing. Credit Unions usually have CDs that require a minimum of $500 to start and commercial banks may require $1,000.
CD Duration/ Start Date CD Expiration Date
|6m (June 1, 2017)||December 1, 2017|
|9m (June 1, 2017)||March 1, 2018|
|1y (June 1, 2017)||June 1, 2018|
|6m becomes 1 year||December 1, 2018|
|9m becomes 1year||March 1, 2019|
|1year (renewed)||June 1, 2019|
|2.5 year (June 2017)||December 1, 2019|
|6m becomes 1 year becomes 1 year (again)||March 1, 2020|
|1 year (renewed again)||June 2020|
|2.5 year becomes 1 year||December 2020|
The above table illustrates what CD laddering is. This process allows the individual to receive money every 3-6 months. So, if they need money they can take all of that money from the CD that expires. If they do not need the money, they can renew as illustrated above and continue the ladder. The benefit of the ladder is, that you will be able to take advantage of the different CD rates each year. If you’re with a credit union, you can add $250 at a time to a CD during its process. Without adding the $250 to a $500 CD, you would make only 25.26 total (using today’s rates at a local credit union). This isn’t much, but at least there is some money made. Once you have enough money to invest, you can invest it in other accounts.
This will not give a lot of money, but it forces you to keep the money in an account. Which this money can be used to pay for big purchases.