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BVC #4: Certificate of Deposit (CD) Ladders [VIDEO]

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The idea behind certificate of deposit ladders is pretty simple, explaining it in only words is fairly difficult. If you’ve ever tried to understand how a certificate of deposit ladders worked by reading it off a piece of paper, it probably took you a long time or you quit because it was too complicated. With the power of video, we’re able to bring the explanation to life and, if you’ve ever had trouble understanding, clear those things up for you.

If you’re unsure what a certificate of deposit is, take a few moments to read my Basics of Banking post. Under account types, I explain what a certificate of deposit is.

I mentioned how ING Direct made is easier for you to create a CD ladder, there’s more about that on my post explaining how to ladder CDs at ING Direct. As is typical of most banks, they only offer 6-, 9-, 12-month CDs (for CD maturities of less than or equal to 12 months, they offer longer maturity terms though) but you can open multiple CDs through the one form, simplifying things. They don’t have the best CD rates though.

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20 Responses to “BVC #4: Certificate of Deposit (CD) Ladders [VIDEO]”

  1. Miranda says:

    Great explanation. We have yet to make a successful CD ladder. But after this, I think it’s time to try again. :)

  2. Excellent visual explanation.

    Quick addition for any readers: There’s no reason that a CD ladder necessarily has to be limited to 12-months.

  3. Ray Sanchez says:

    It was a good visual explanation. A great teacher indeed! :)

  4. Matt Fyffe says:

    Hey Jim,
    Are you sure ING’s is limited to 1 year in length? I’m pretty sure the ladder I have there has a 1.5 year cd in it.

    Overall, I wish I’d understood these more when I first started investing. ING had 5% CDs at the time but I only took advantage of them at the 1 year/1.5 year lengths. Had I added a 5 year CD in there with a small amount of money, I would be able to have all of my money in CDs right now earning 5% interest rates.

    I definitely recommend ladders to everyone as it allows you to invest your money in a way to adapt to the economic changes, as well as your own personal needs.

    • Jim says:

      Did I say they were limited to a year in length? I know they have multi-year CDs (which are very common) so if I said that, I misspoke.

      • Matt Fyffe says:

        Jim, in your post description when referring to ING, you say:
        “As is typical of most banks, they only offer 6-, 9-, 12-month CDs but you can open multiple CDs through the one form, simplifying things.”

        Correct me if I’m wrong in interpreting that as I did.

        • Jim says:

          Ah, I meant that they only offered 6, 9, and 12 months for periods of less than 12 months; sorry about the confusion. I updated the post to reflect this.

          Thanks Matt!

  5. That’s a very familiar-looking whiteboard! Did you get the skull-and-crossbones magnets with it, too? :)

    Good video. Sending it to a couple friends who asked me about CDs recently.

  6. Andrew says:

    CD ladders are hard to understand? Really?

  7. Anthony says:

    I have a question for those with CD ladders already going. I understand that you will reinvest your matured CD into another CD. Do you simply reinvest your investment/interest? Or do you continue to add a little to each new CD? Just curious…

    • Jim says:

      I only reinvest my original investment, so my CD is still balanced, but you can invest the entire thing (principal + interest). I put the interest towards other savings goals I have.

  8. Dee says:

    Color me realllly confused :/

    Before this post, I knew nothing about CDs, so forgive me. I always assumed it was above my head so I never looked into it. (and apparently I was right)

    Can someone explain the “rolling” part of the ladder?

    When you roll the shorter-term CD into the longer-term CD, are you simply adding to the total principal of the long CD, or buying a new CD altogether?

    • Jim says:

      Shoot, this was supposed to make it easier. :)

      When you roll the matured CD into the longer term, I just take the principal of the original CD and use it to buy the new CD. The long CD, the 12 month, has now become your 11 month so you’ll need to buy a new 12 month CD.

  9. dmeanea says:

    It seems to me that there’s a trade-off with a laddering system as opposed to a single CD: basically, you’re investing time and effort to set up and maintain multiple CDs in return for the funds being more liquid (available). Thus, as you design your own laddering system, you have to find a good balance between how often you might need the money and how many accounts you’re willing to maintain.

    Another trade-off: the more CDs you split your money into, the more often you’ll have money available, but the smaller that available portion becomes. If your cash needs exceed that available amount, you’re going to have to dip into your un-matured CDs.

    This brings up the point that you need to know what the early withdrawal fees are on the CDs you set up. The HSBC website says, “If you do withdraw any principal prior to maturity there is a penalty equal to 30 days simple interest.” It seems to me I’ve seen a few other banks which charge one quarter’s (90 days’) worth of interest as a penalty. Neither of those seem like very harsh penalties to me, so I consider a CD to be almost as liquid as my checking and savings accounts.

    I prefer to have 12-month CDs which mature every six months. I don’t want to maintain more than two accounts, and if a cash emergency does arise between maturity months, the money is available for a small fee.

    As always, any feedback is appreciated. :)

  10. Dee says:

    Thanks Jim!

    The video did make it easier, I just came in clueless! Haha.

    I think I get it now.

    Great blog :)

  11. Hank says:

    Jim,

    Great video! I really enjoyed watching it. You really broke the concept down, and you are right…watching it on a video was better than just reading the words on a computer screen in a blog post. Thanks!

  12. CuriousAG says:

    Jim can I provide a link to this vide on my blog? Really found it very clearly explained :)

  13. pauls says:

    An excellent explanation with brilliant clarity. Nice work!


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