Friday, September 21, 2007

CD Laddering! It'll make you happy

I see it everynight, usually due to my late bedtime. These minutemen yelling at you on TV about how their investment strategy is different than everyone else's, and that's why you'll be rich in the morning. What you don't realize is they have a different investment strategy, you! They pay for the commercial so you call them and give them money. It's that simple, they just glorify it. If you don't believe me, stay up late tonight and watch for the infomercials. As soon as you see one, write the guys name down, go to google.com and type in his name and the word fraud. I haven't had one fail yet. So what am I getting at? SMART investing. You don't get rich overnight, very few do. It's a gradual buildup. I'm going to cover one of those ways now.

If you're at this site now, which I'm willing to bet you are, you've probably heard of a CD or Certificate of Deposit. I'm also sure that you've seen many of the meager interest rates for the short term CDs. Most people can't afford to have $5,000.00 tied up for 5 - 10 years. CD Laddering tries to help remedy this problem. How does it work? Let me show you:

You have Money($) Ch-Ching. Let's say $2,000.00, And you want to buy CD's(Certificates of Deposit, not music!). This is how CD Laddering would work. $500.00 in a 6-month, $500.00 in a 1 year, $500.00 in a 1 year 6-month, and $500.00 in a two year. When the 6-month one matures, you just reinvest it as a 2 year. What does this accomplish? It gives you a steady flow of income, about $500.00 every 6 months plus the interest earned. It also allows you to get the higher interest rate on the longer term 2 year.

As you keep reinvesting eventually all of the CDs coming in are maturing with the two year interest rate. And you're getting one every six months!

Example: This is an example I made of a CD ladder, I know, I know, I used $5,000.00 as my figure, but I just needed to show the actualy difference it can make. It's all proportional. Notice that it shows a $5,000.00 ladder VS. using a $5,000.00 single CD investment. Click the picture to enlarge.



Here are some resources so you can further investigate.
http://www.bankrate.com/brm/news/sav/20010521b.asp - Article on CD Laddering.(BankRate.com)
http://www.dinkytown.net/java/CDLadder.html - A CD Laddering calculator, remember to adjust the interest rates for the longer term CDs, you'll understand once you play with it.

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