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braisler · 02-02-2005, 05:16 AM

Boo, I was thinking of making a post about CD ladders as well, but you beat me to it. I will add this point though. Depending on your age, CDs should not make up more than 10-20% of your investment total. The advantage of CD ladders is that you can eventually reach a point where all of your money is earning the maximum (5 year CD) yield but you still have money coming due periodically as you might need it.

For example:

Invest $1000 in 1 year CD = 2.1%
Invest $1000 in 2 year CD = 2.4%
Invest $1000 in 3 year CD = 3.2%
Invest $1000 in 4 year CD = 3.6%
Invest $1000 in 5 year CD = 4.25%

Then when your first CD matures, one year later, use that principal + interest to buy a new 5 year CD. Do this each year and you will always have some money coming out of a CD each year, but they will all be rolling around at the highest 5 year yield. Of course, you can use a smaller amount and start a CD every month or every 3 months, but your goal should remain to reach the highest available yield while preserving some liquidity.

ING Direct, an online bank I use and recommend to anyone, has a great feature where you can automatically set up a CD ladder. In addition, you can set it up so your money automatically rolls into the highest yielding CD available upon maturity. That is, they have taken the work out of it and your money does the best it can for you automatically.

Again, depending on age, I wouldn't sink all of my money into a CD or CD ladder as a main vehicle for investing. But they are fully guaranteed (up to $100000) and a nice way to have continued assurance of financial security with at least some interest income. This is a great way to grow your "emergency fund" without risk.

Thanks for all of the great tips everyone!

02-02-2005, 05:16 AM	#9 (permalink)
braisler Addict Location: Midway, KY	Boo, I was thinking of making a post about CD ladders as well, but you beat me to it. I will add this point though. Depending on your age, CDs should not make up more than 10-20% of your investment total. The advantage of CD ladders is that you can eventually reach a point where all of your money is earning the maximum (5 year CD) yield but you still have money coming due periodically as you might need it. For example: Invest $1000 in 1 year CD = 2.1% Invest $1000 in 2 year CD = 2.4% Invest $1000 in 3 year CD = 3.2% Invest $1000 in 4 year CD = 3.6% Invest $1000 in 5 year CD = 4.25% Then when your first CD matures, one year later, use that principal + interest to buy a new 5 year CD. Do this each year and you will always have some money coming out of a CD each year, but they will all be rolling around at the highest 5 year yield. Of course, you can use a smaller amount and start a CD every month or every 3 months, but your goal should remain to reach the highest available yield while preserving some liquidity. ING Direct, an online bank I use and recommend to anyone, has a great feature where you can automatically set up a CD ladder. In addition, you can set it up so your money automatically rolls into the highest yielding CD available upon maturity. That is, they have taken the work out of it and your money does the best it can for you automatically. Again, depending on age, I wouldn't sink all of my money into a CD or CD ladder as a main vehicle for investing. But they are fully guaranteed (up to $100000) and a nice way to have continued assurance of financial security with at least some interest income. This is a great way to grow your "emergency fund" without risk. Thanks for all of the great tips everyone!