Cashing in on CDs
Here's a strategy for investing in CDs without having to worry if you're locking in the best rate.
By Walter Updegrave, MONEY Magazine senior editor

NEW YORK (MONEY) -- QUESTION: I've been pleasantly surprised at the recent rise in interest rates for CDs. What is the best way to evaluate the potential for CD rates to increase, and how do I know when it's a good time to lock in a rate rather than waiting for rates to go up still more? -Dennis, Pasadena, Calif.

Funny thing about interest rates. It's easy to see how much they've risen during the past year, almost two percentage points in the case of six-month CDs and about one percentage point for five-year CDs. And in some point in the future, it will be a cinch to look back and see when this upward trend has hit its peak and rates have leveled off or being drifting back down.

CDs & Money Market
MMA 0.44%
$10K MMA 0.35%
6 month CD 0.55%
1 yr CD 0.95%
5 yr CD 1.69%

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But trying to predict when rates have climbed as high as they're going to go in this cycle and then locking them in at the peak, well, now we're getting into Mission Impossible territory.

Fact is, the financial markets are full of people who spend their entire careers tracking and then trying to predict the course of interest rates - economists, bond traders, bond fund managers and derivative traders, just to name a few. But few are able to consistently call peaks or troughs in rates.

Which leads me to my first bit of advice for you: Don't even try. You'll never really know, and no matter how many facts, statistics and pseudo-statistics you use to back up your contention, at best you'll only be guessing.

That may sound disheartening, but it shouldn't be. In fact, I consider it liberating. Why? Because if you follow my second piece of advice, you can get a good competitive return on your CD money without all the hassle of trying (and failing) to foretell interest rates.

That advice: Build a ladder.

A ladder strategy

I'm talking, of course, about a CD ladder. The strategy is simple. Let's say you have $10,000 to invest.

There's an alternative to throwing your entire ten grand into a five-year CD in the hope that rates are at their peak or into a one-year CD figuring you'll reinvest for a fatter yield in 12 month's time.

The better way is to spread your money among CDs of staggered maturities.

So, for example, you might put $2,000 each in CDs with one-, two-, three-, four- and five-year terms. At the end of one year, you take the proceeds from your one-year CD that's matured and you buy a new five-year CD.

This way, you have the same five-rung ladder you had before. You've got the new five-year CD you just bought. Last year's five-year CD now has a four-year maturity; the old four-year CD is now a three-year; last year's three-year CD now has two years remaining; and, your former two-year CD is now effectively a one-year CD.

You just keep repeating this process, taking the proceeds from the CD that matures and replacing the rung with the longest maturity, and like the Energizer Bunny, your ladder will keep going and going and going...

A system with advantages

This strategy has several advantages.

One is that a disciplined system like this prevents you from betting a big chunk of your CD money on predictions that fail to pan out.

Another advantage is that since you have CDs maturing on a regular basis, you always have money available to reinvest at prevailing rates. Thus, if rates have risen over the past year, you'll be able to take advantage of them with the proceeds of a maturing CD. Of course, it's also true that if rates have fallen, you'll have to re-invest at the lower rates. But, remember, you still have CDs that have locked in earlier higher yields.

One final plus to this system is that you'll always access to at least some part of your CD stash on a regular basis should you need it for living expenses, an emergency, or whatever.

I should add that laddering virtually assures you won't earn the best possible return. But like diversifying with stocks, laddering with CDs also prevents you from having all or most of your money in the wrong place - stocks that flame out or long-term CDs with low rates at a time when rates are rising. In short, you get a good solid return while giving up some upside and getting protection on the downside.

All in all, I think that's a pretty good deal. (For a more detailed look at the benefits of laddering, click here.)

There's no reason, of course, why you shouldn't try to get the highest return on your CDs when you're building your ladder. After all, if you can get CDs from banks or other institutions that are paying a higher yield than their competitors, that translates to more money in your pocket.

And unlike the ups and downs of interest rates, finding higher yielding CDs is something you do have control over. By checking out sites like and the Interest Rates section of this site, you can screen for the highest yielding CDs in your area for whatever maturities you need, and often find CDs that are paying a good half percentage point or more than the national averages.

So stop obsessing over where rates are headed and whether or not they've finally topped out. Instead, just build a ladder. And over time, you'll see the value of your CD stash climb very nicely.


A get-started retirement plan

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