CD Ladder

Any of you over a certain age will remember the big shelving contraptions that people used to buy in order to store their CDs...rows and rows of music. That's a different kind of CD ladder.

In this case, CD stands for "Certificate of Deposit," a relatively conservative investment and an option for those who are risk averse. In its simplest form, a CD is cash you give to a bank in exchange for a certificate that promises to pay you a certain interest rate. You get more money than you'd get from a savings account, but your cash is tied up for some period of time. You have to wait for the CD to mature.

Laddering means you buy a bunch of CDs, each with different maturities. A CD can be purchased in various maturities (6, 12, 18, or 24 months or more). By buying multiple maturities, you increase your average interest, while ensuring that cash comes available on a rolling basis. So a potential laddering strategy could look like this:

1-year CD - $5,000
2-year CD - $5,000
3-year CD - $5,000
4-year CD - $5,000
5-year CD - $5,000

You’ll earn more interest over the long run and because one CD matures each year, you can choose to continue the five-year ladder or take the cash and buy more stuff...if you choose.