No one likes to lose money, but it happens all the time, whether due to external economic conditions or even your own mistakes. However, there are ways to minimize the amount of money you lose on your investments as well as maximize your profit from them over time. One strategy that can help you do this involves creating what’s known as a CD ladder. Here’s how it works and how it can benefit you.
Advantages of Keeping Cash in the Bank
If you keep your cash in a CD, it is guaranteed to earn interest at a predictable rate. There is no risk of losing money because banks are required to provide $250,000 in coverage against theft or unauthorized use. Interest rates are typically higher than typical savings account rates and it has more options for high yields with monthly payments that range from 3 months up to 5 years.
Types of FDIC-Insured Accounts
Before choosing an investment, you’ll want to research different types of accounts available in order to find the one that best suits your financial needs. One of these account types is a CD or certificate of deposit. A CD is a type of savings account that has terms between 1 month and 5 years and usually offers higher interest rates than traditional savings accounts. FDIC-insured CDs are considered safe and sound investments because they’re insured by Federal law against loss in case your bank fails.
Why Cashing Out Might Not Be Such a Good Idea
I never thought I would be able to answer this question because I always thought that investing in a CD ladder was not worth it, or at least not as worthwhile as other investments like bonds. However, after doing some research, I have changed my opinion entirely and believe that CDs are worth investing in if you’re not looking to move your money around too often.
The Benefits of Investing in CDs
A CD Ladder is a good way to manage a budget. For example, if you want to save $250 per month, simply break it down and deposit $50 into your savings account each month. When you are ready to start investing in CDs, take that $500 and divide it in half. Save $250 for 3 months and then invest the other $250 into a 12-month CD with 2% APY.
A Few Disadvantages
Though CDs may seem like a safe, low-risk investment for people with more stable jobs, CDs do come with disadvantages. First of all, CDs are generally fixed interest and you cannot withdraw your money during the term. Plus, if you don’t know what type of CD you should buy (traditional CD or callable), then this can be a little confusing
Tips on Closing and Opening CDs
Consider using a CD ladder when you want to take advantage of higher interest rates but still maintain access to your money. The way that a CD ladder works is by opening CDs at fixed intervals, say $5,000 on the first day and then another $5,000 after six months. This process repeats so you always have a matured CD coming up and being replaced.
What Are Some Alternatives?
Some alternatives to CDs are earning interest with a money market account, an online bank that offers higher interest rates, or an individual retirement account. A high-interest savings account is another alternative if you’re feeling adventurous. These tend to have higher risks and can cause your money to be unavailable while it earns interest. It’s important to weigh the risks and benefits of each option before deciding which one is best for you.
The Final Word on Investing in CDs
CD laddering is one of the best ways to maximize your money. To start, divide a sum of money you want to invest between three CDs at different lengths (short term, midterm, long term). Every few months or years, after paying off the short-term CD and putting a set amount into each long-term CD without withdrawing anything from it, move some funds into a new short-term CD. The end result will be that you have an alternating mix of money available every few months.