Laddering CDs: Some peace of mind for market volatility

KANSAS CITY (10/22/07)--Given recent ups and downs in the market, are you looking for an investment strategy that gives higher dividends than a regular savings account, is federally insured, and offers predictable returns? Consider laddering your certificates of deposit (CDs) (The Kansas City Star Oct. 13).

Mary Rhodes, director of deposit services at CommunityAmerica CU, Lenexa, Kan., emphasizes that wary investors shouldn't shy away from CDs in today's shaky economic environment--particularly when they consider the benefits of laddering.

Rhodes' recent article in the Kansas City Star explains that laddering CDs helps you insulate some of your investments from recent economic events. She stresses the importance of regularly expiring CD terms so your money is available to you as often as you like, while giving you a stable investment return.

Industry experts agree. In addition to a stable source of income, laddering can help give you more liquidity (Bankrate.com).

Here's an example of how laddering works: If you have $5,000 to invest, put $1,000 each into certificates maturing in one, two, three, four, and five years. Then, one year later when your first certificate matures, you either can cash it in or reinvest that sum in a new five-year certificate. When your two-year certificate matures the next year, you can reinvestment in a new five-year certificate, and so on.

The result: Each year you have a certificate maturing and can opt to take the cash or invest it for five years. This means by the end of the fourth year, all your money is earning dividends at the five-year rate.

Not crazy about tying up your money for long periods of time? For more frequent rollovers, try laddering in three-month, six-month, or nine-month terms. Regardless of the time period you choose, if interest rates increase, you can reinvest each period at the new, higher rate. If interest rates fall, only a portion of your money is locked in at the previous higher rate.

Remember: Structure your ladder to meet your needs, and use the same term for each certificate when you roll it over at maturity.

For more information, read, "Ladder Your Way to Bigger Savings" in Plan It: Retire Ready Toolkit.

courtesy of cuna.org