How to invest in CDs, Money Markets & Savings AccountsCD LadderingBill Gerhard: Hi! I'm Bill Gerhard, Director of Financial Services for AAA. This video series discusses how to invest in CDs, Money Markets and Savings Accounts. Now I'll explain CD Laddering, a strategy that can optimize your earnings.
It's hard to beat the rock salt security of CDs, they aren't subject to the wild swings of the stock market and they add steady returns to your investment portfolio. However there is some risk, rates could increase during your CD term and you're locked into a lower rate.
Building a CD ladder makes a good investment even better. A "CD ladder" is a series of investments put into several CDs with different maturity dates. The "spread" helps protect you from the low interest rates if the economy is in a slump and allows you to take advantage if the rates are rising. Spreading out maturity dates also produces some liquidity; one or more CDs will always be approaching maturity.
Let's look at an example of a 3 year ladder strategy; you would deposit equal amounts into a CD that matures in 3 years, one that matures in 2 years and one that matures in one year. One-third of your deposits would mature every year, you would have access to those funds to reinvest. As CDs mature, you would reinvest them at the 3-year term which would pay you the greatest interest rate or if you had a need for the funds you could liquidate the maturing CD or invest for a shorter period.
I hope this has helped you understand more about Laddering CDs. AAA offers you information in this video series for educational purposes only. Carefully consider objectives, risks, expenses and tax implications before investing.
Our next video is an overview of Compound Interest and the Rule of 72.