3 Steps to Build the Best CD Ladder

If you are a saver at heart, you may have sat on the sidelines while your friends jumped into earlier investment waves for dot-com, energy or biotech stocks.

But it soon could be the savers’ turn to catch a wave.

That’s because inflation is fast becoming a buzzword in investing circles. When inflation kicks in, or even the threat of inflation emerges, higher interest rates usually follow.

If interest rates rise, you can invest while keeping your money FDIC-insured by utilizing a CD ladder, a simple investment strategy to maximize income over time that calls for buying multiple CDs with different maturity dates.

Before you buy, you should determine when you might need to tap into your savings. You want to have cash ready in case you have a big expense like a new car, vacation or a wedding.

How To Build the Best CD Ladder

Step 1. Spread it out and be vigilant

To begin building a CD ladder, make sure you purchase certificates so they mature at regular intervals.

Let’s say you want your CDs to mature every six months.

Start off by buying one 6-month, 12-month, 18-month, and 24-month certificate. When your 6-month certificate matures, turn around and reinvest it in a 24-month CD.

Each six months thereafter, reinvest your maturing certificate in a 24-month one. Eventually, you will only have 24-month terms in your ladder, with one maturing every six months.

It’s important to keep track of the maturity dates. A bank can automatically roll over the account — to what might be a lousy rate — if you do not contact it close to maturity date.

Set up a simple reminder system, so that you can take advantage of the best CD rates and terms.

Step 2. Don’t try to outguess inflation

A laddered portfolio works to your advantage when inflation pushes up interest rates. As your investments mature, you should be able to find new certificates at higher rates.

But when deciding when to buy, accept that your timing will never be perfect. Don’t try to figure out when interest rates will move higher. The truth is, nobody knows for sure.

Right now, inflation is relatively tame in the U.S. According to government data, consumer prices are increasing at less than 2% annually. Fed Chairman Ben Bernanke has said he expects inflation will remain subdued for the rest of the year.

Not everyone agrees. Some on the Fed’s interest rate-setting committee are inflation hawks and have tolled the inflation-warning bells. Republican lawmakers and some leading economists also have suggested higher inflation is on the horizon.

Why does this matter?

For savers who play their cards right, higher interest rates can mean more income from their bank accounts. The trick is to keep reinvesting at higher rates, so your earnings outpace the higher cost-of-living.

Step 3. Find the best rate

Finally, you want to make sure you always shop around and find the highest yields. Your CD ladder does not have to be perfectly symmetrical if you can find higher rates at slightly different time frames.

In a perfect world, when inflation hits, all your debt is at a fixed rate and your ladder will start making you more money.

If you want to see just how much money you can save by employing a ladder strategy, check out the our CD laddering calculator.

This useful online tool shows that you can take advantage of inflation, instead of getting blindsided by it.