Q: Today’s question comes from Elizabeth. She writes: “What’s a CD ladder?”
A: A CD ladder is an investment strategy. Here’s how it works – you take a sum of money and then, divide it into multiple certificates of deposit (CDs), which have staggered maturity dates.
For example, say you have $10,000 to invest. Instead of putting the whole amount into one 5-year CD, you might break it down into five CDs that have maturities of 1, 2, 3, 4 and 5 years. When each CD reaches maturity, you can invest it into a new, 5-year CD to keep the ladder going or use the funds for another purpose.
Fans of CD ladders like the strategy for a number of reasons, one of them being that you’ll have pretty easy access to your funds as the CDs mature on a rolling basis. They also allow you to grab rising interest rates over time, if we’re in a period where they’re headed up. Or, hold onto them longer if they’re going in the other direction. If you’re a conservative investor or new to investing altogether, CDs can be a good option as they are low-risk and typically FDIC-insured.