Extend Your CD Ladder as Rates Rise

Dear Dr. Don,
When I set up a CD ladder, I want to beat the best online savings rate but not get into very long terms because I predict CD rates will start going back up again. If I divide $75,000 into five certificates of deposit (at 12, 18, 24, 30 and 36 months, respectively) using the best rate available for each term, won't all my CDs be 36-month as I renew them all at maturity as 36-month CDs? Thereafter, I would have a CD maturing every three years. Is this right?
-- Brian Buildit

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Dear Brian,
You're a little confused on how a CD ladder works. If you invest in a CD ladder with maturities, or rungs of the ladder, every six months, and you reinvest the maturing CD out to the maturity limit of your CD ladder -- in your case, three years -- you'll continue to have a maturity every six months.

You can shop yields on Bankrate using its "compare rates" feature to find the highest yields in your local market and nationwide. I don't think you're gaining much by having a five-rung ladder over a three-year investing horizon; I think three rungs are plenty. I compared the two approaches in the table below:

CD ladder strategy
  APY Deposits Alternate deposits
12-month 1.30% $15,000.00 $25,000.00
18-month 1.41% $15,000.00  
24-month 1.55% $15,000.00 $25,000.00
30-month 1.66% $15,000.00  
36-month 2.15% $15,000.00 $25,000.00
First year's interest income:   $1,210.50 $1,250.00

You can use Bankrate's CD ladder calculator to model different ladders.

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I like your idea of staying short for now with the rungs on your CD ladder. Make it an extension ladder when longer-term CDs offer better rates.

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Purists will say you're trying to time the market, which goes against what a CD ladder is all about. The purists need to recognize that when you initially construct a CD ladder, you're investing all these deposits at a single point in time, which has its own market-timing issue. The time diversification comes into play as you reinvest maturing CDs out to your maximum maturity.

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