A Safe Investment Plan: Create a CD Ladder

The road to riches is loaded with detours, dead-ends, and unlikely shortcuts. Those unmarked trails, though tempting, are best suited for experienced investors. For the rest of us, it's more appropriate to stick with clearly marked roads and proven navigational techniques.

CD basics

One such road is the federally insured, bank-issued certificate of deposit (CD). When you purchase a CD, you're agreeing to lend your money to the bank for a specified time period. In return, you earn a competitive rate of interest on the funds. It is possible to withdraw your money early, but you will be assessed a small penalty.

The main drawback to CD investing is its loss of liquidity. You also run the risk of locking in one rate, only to see current market rates climb higher.

Laddering CDs to minimize risks

The key to successful investing is obtaining the highest return possible while minimizing the associated risks. Here's where this proven financial strategy comes into play: You can maximize your liquidity and minimize your interest rate risk by building a CD ladder.

To demonstrate how a CD ladder works, let's assume you have $5,000 and you feel comfortable with six-month terms. You would build your ladder with five separate $1,000 CDs with the following maturities:

• CD1, six months
• CD2, 12 months
• CD3, 18 months
• CD4, 24 months
• CD5, 30 months

As each CD matures, you'd roll the money into a new 30-month CD. Renewing CD1 for 30 months, for example, would cause it to mature exactly six months after CD5. When you use the same 30-month term for each subsequent renewal, your maturities would remain staggered six months apart. In doing so, you'd earn the higher CD rates associated with longer terms, while still having partial access to your savings at regular intervals.

If you fear the sheer canyon walls and big, hungry bears of the investment world, then stay on the main roads of federally insured deposits. Just don't overlook any opportunities to quicken your pace. This ladder could just be your stairway to financial heaven.