How to Set up Laddered CDs

You've heard about climbing the corporate ladder; now it's time to climb the ladder to wealth. A structured certificate of deposit (CD) strategy can be one means of ascending another rung towards meeting your financial goals.

Getting more out of your cash

The CD is a safe, predictable way to invest your money. Unfortunately, it has one big drawback: a lack of liquidity. When you open a CD, you're required to keep your money on deposit for a specified time period; in return, the CD issuer pays you a competitive, fixed rate of interest. Considering that your CD is also FDIC insured, this is a good deal-as long as you don't need your cash.

But because life doesn't always go as planned, you might not be comfortable locking away your money for long periods of time. A three-month CD might be an option, but you'd have to give up on yield. GMAC's three-month CD, for example, was recently paying an APY of 3.25 percent-a far cry from the 5 percent APY on the same issuer's five-year product. Plus, since the 3.25 percent is only slightly more than you'd earn in an online savings account, the CD may not be worth the trouble.

Here's how to play this money game. A laddered CD portfolio can give you the best of both worlds-high yield plus greater liquidity.

Creating liquidity with periodic maturities

Laddered CDs are strategically structured CD portfolios. Each one in your collection will have a different maturity date, enabling you to have access to your cash at regular intervals. The first step in creating this ladder is deciding how often you want your CDs to mature.

Let's look at an example. Say you have $10,000, and you prefer to have access to this cash at least twice a year. For simplicity's sake, let's also assume that the date is currently June of 2008. You would set up your ladder by purchasing four $2,500 CDs as follows:

1. CD 1, six-month term, maturing December, 2008
2. CD 2, 12-month term, maturing June, 2009
3. CD 3, 18-month term, maturing December, 2009
4. CD 4, 24-month term, maturing June, 2010

You now have four scheduled maturities occurring at six-month intervals. When each CD comes up for renewal, you need to renew for the longest term or, in our example, 24 months. After one round of renewals, your CD ladder would look like this:

1. CD 1 renewed for 24 months, maturing December, 2010
2. CD 2 renewed for 24 months, maturing June, 2011
3. CD 3 renewed for 24 months, maturing December, 2011
4. CD 4 renewed for 24 months, maturing June, 2012

Thereafter, if you renew every expiring CD for another 24 months, you'll be earning the 24-month interest rate with CDs that mature every six months. That might give you a nice boost up the ladder of financial security.