CD Ladder Get Paid Every Year

A CD Ladder is a strategy used when buying CDs (certificates of deposits). Meaning, a CD Ladder is nothing more than a plan. Let’s use Jane as an example. Jane wants to save more money. However, in the currently economy saving accounts, and money market accounts are not paying high interest rates. Jane turns to CDs (certificates of deposits). One problem Jane is faced with is — she only has $25,000 which is her total saving. Jane doesn’t want to lock the money into a CD. Why? Jane is afraid that an emergency will come up. This is when a CD Ladder is a good strategy to use.

CD Ladders Explained

• Purchase the longest term CD with the best interest rate. Jane, found a 60 month CD at TD Bank paying 3.00%. Jane takes $10,000 and buys that CD.
• Jane currently has $15,000 that she does not want to lock away for 5 years (60 months) — in case of an emergency.
• Jane decides to purchase another CD from Wells Fargo/Wachovia. This 32 month CD has an interest rate 2.75%. However, Jane must invest $5,000 or more (this is one of the bank’s requirements — bank requirements vary from bank to bank). Jane decides that she can lock this portion of money away for 2 1/2 years.
• Jane currently has $10,000. She decides that she can manage any emergency with $2000. So, she purchases another CD from TD Bank with $3000. This 9 month CD has an interest rate of 1.40%.
• Jane currently has $7,000. She decides to purchase another CD from TD Bank with $5,000. This 48 month CD has an interest rate of 2.75%
• Jane leaves $2,000 in her existing account for emergencies.

CD Laddering Demo

• $10,000 in a 60 month CD at 3.00% = $1,500 in interest income at the maturity date (2014).
• $5,000 in a 48 month CD at 2.75% = $550.00 in interest income at the maturity date (2013).
• $5,000 in a 32 month CD at 2.75% = $366.67 in interest income at the maturity date (2012).
• $3,000 in a 9 month CD at 1.40% = $31.50 in interest income at the maturity date (2011).
• $2,000 in ING Orange Savings account at 1.40%

Use the CD Calculator

As you can see Jane has laddered her CDs to reach a maturity date each year. Jane also elected to receive month interest income payments that are transferred back to her ING Orange Savings account each month. If you elected to have interest paid out during the course of the CD term at maturity date you only received your principle amount. Why would you elect to receive interest income throughout the course of the CD’s term? In the beginning we stated that Jane was nervous about emergencies. Therefore, Jane wants some money each month to calm her fears. Another reason why monthly interest payments are good is if the rates are due to rise. If the rates do rise hopefully you will have enough money to invest in a higher CD rate. Remember, at the maturity date you will have the option to have the CD auto renew (not suggested) or cashed out. Cash out and search for the best rate to invest.

CD Monthly Interest Payments

• 60 month CD = $25.00 per/month
• 48 month CD = $11.46 per/month
• 32 month CD = $11.46 per/month
• 09 month CD = $ 3.50 per/month
• Saving Acct = $ 2.33 per/month

Total Monthly Interest Income for Jane = $53.75. Each month this interest income will grow if Jane does not use the money in her savings account. Why? Jane has elected to transfer the interest from her CDs into her savings account. Her savings account balance will grow and so will the interest she received on it. Hopefully, when rates go up — Jane will have enough money in her savings account to purchase another CD.

Keep on the Cutting Edge with your Finances

• Kiplinger’s Personal Finance magazine
• SmartMoney (1-year)
• Money (1-year)

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Other Resources

• Wachovia Bank CDs
• Emigrant Direct High Interest Accounts
• Personal Finance Questions with Simple Dollar Answers Aug 10 2009
• Why I Purchased Bank Certificates of Deposits – CDs