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The certificate of deposit ladder is a strategy in which an investor will divide the amount of money meant to be invested to certificates of deposit in equal amounts. The modern certificate of deposit is a saving certificate that locks in your money at a set interest rate for a certain period of time, also called a maturity date.
The CD ladder works by locking your money for a set time period, sometimes up to more than 5 years. The longer the CD’s term, the larger your deposit and the higher your rates.
Let’s assume that you are setting up a 5-year $5,000 CD ladder. You will divide your initial deposit into 5 equal CDs. In the first year, here’s how you could deposit your money.
$1,000 in a 5-year CD
$1,000 in a 4-year CD
$1,000 in a 3-year CD
$1,000 in a 2-year CD
$1,000 in a 1-year CD
When your 1-year CD matures, you will get $1,000 plus the interest you earned. And because it is a CD ladder, you have also worked at least part of that money into a new 5-year CD. In one year, your 2-year CD ladder will be also available to do the same. This certificate example strategy will continue to work as each initial CD matures.
The CD ladder is very useful to anyone who is planning to manage his or her deposit effectively. To get the most out of your CD is to stay on top of it and monitor every change. While there is a law that requires your bank to notify you every time your certificate in word matures, it is still the best idea to do it on your own and add an extra measure of planning.
Take a look at this strategy to keep it simple.