Certificate of deposit laddering is a investment strategy used when interest rates are rising. Interest rates can go up or down but usually head in one direction for a period of time. When the economy is strong, jobs are being created and inflation is heading up the Federal Reserve will raise interest rates to stop inflation of running out of control.

If the Fed doesn\’t keep inflation under control prices for goods and services start heading higher. To keep up with the page of prices for goods and services wages are heading higher as well, then the cycle repeats itself.

The most recent period of time when this cycle happened was in the 1970\’s and 1980\’s. As a result of high inflation interest rates were sky-high. You could find 12 month CD rates at banks and credit unions between 12 percent and 15 percent.

Over the past couple of years when the recession hit the federal funds rate was lowered to a range of zero percent to one quarter percent by the Federal Open Market Committee. As a results, 12 month CD rates are averaging less than one percent. In fact, 12 month bank CD rates and credit union CD rates are averaging 0.69 percent.

Right now you can find 12 month CD rates higher than the national average rates. 12 month CD rates can be found as high as 1.50 percent which doesn\’t sound that great but when inflation is zero percent the CD rate isn’t that bad of a deal.

Interest rates and CD rates can also rise during a slower economic environment, during \”stagflation times\” like we had in the 1970\’s and we might have again.

When investing in certificates of deposit you\’ll find the longer the certificate of deposit term, the higher the interest rate or interest yield usually is, unless the yield curve is inverted, than longer term rates will be lower than shorter term rates.

Certificate of deposit laddering is used to evenly spread out investments in certificate of deposit deposits over a period of several years. The end result of a certificate of deposit ladder is the investor has all of their funds deposited in longer term certificates.

Longer term certificates usually pay a higher CD rate, but you still have a certificate of deposit mature every year so you have access to your money but still have all the benefits from investing in certificates of deposit that have higher CD rates.

Here is an example of a certificate of deposit Ladder. Let\’s use a three year strategy with $30,000 for this example. The investor deposits $10,000 in a 3 year certificate of deposit, $10,000 in a 2 year certificate of deposit and $10,000 in a 1 year certificate of deposit.

After year one, the 1 year $10,000 certificate of deposit matures, the depositor then invests the money in a 3 year certificate of deposit. After year two, the 2 year $10,000 certificate of deposit matures; the depositor invests in another 3 year certificate of deposit. After two years all funds are invested in 3 year certificates of deposit at a higher interest rate, again, this only works when interest rates and bank CD rates or credit union CD rates are also rising.

Author Bio: Find the best CD rates at MonitorBankRates.com. You can search our CD rates tables in your state or area. You can sort CD rates at banks and credit union CD rates to find the highest CD rate in your area.

Category: Finances
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