Seasoned investors know all about CD ladders. This is the term for what happens when consumers take advantage to great CD rates to create a “ladder” of investments through a mixture of short-term and long-term certificates. In truth, they are a little bit complicated of a concept for the average Joe to understand, and tough to create successfully on one’s own. CD laddering is, as doughroller.net refers to it, “a great way to take advantage of the high interest rates of long-term CDs and the liquidity of short-term CDs.” But it’s definitely not something that is for everyone.
The financial experts at that site recommend a different strategy: opening a single long-term CD with a very low penalty for early withdrawal. With CD rates at all-time lows due to the poor state of the economy, this can definitely be the way to go. That’s provided that the withdrawal penalty is only around two months of interest, like the certificate quoted by the article I read. (The rate in question was offered by Ally Bank, by the way.)
Let’s say that you are able to secure a 2.99% rate of interest on a five-year CD. For whatever reason, or even just your own choice, you might decide to pull that money after just a year. Even with the withdrawal penalty to consider, the net interest rate you’ll receive is still around 2.5%. In other words, FAR better than the current 1.54% rate for a “true” twelve-month certificate. Plus, if rates should happen to shoot up, you won’t be left in the lurch feeling stupid for missing out!
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