Your Best Strategy for Investing in CDs

For most people and most situations, investing in a mix of Equities (stocks) and Fixed Income (money market, bonds and certificates of deposit) will make the most sense.  You need stocks for long-term growth and fixed income investments as a counter-weight to a volatile stock market and as a source of income in the form of interest.  I was recently asked about the best strategy for someone who was interested in investing in certificates of deposit (CDs).  While there are a lot of winning strategies, the one I most-often recommend is a laddering strategy.

Laddered CDs

With this strategy, you divide your money into say, three to five equal piles and invest each in CDs maturing in three to five years.  For example, say you have $90,000 to invest.  A five-year ladder would look like this:

$18,000 in a CD maturing in one year

$18,000 in a CD maturing in two years

$18,000 in a CD maturing in three years

$18,000 in a CD maturing in four years

$18,000 in a CD maturing in five years

The key to this strategy.  Once you have your money invested, the key to this strategy is to reinvest all maturing CDs in a five-year CD.  You may be able to instruct the bank to do this automatically but, in most cases, you’ll have do this ‘manually’ for the first five years.  The reason is that most 1-year CDs will automatically renew for one year; a 2-year CD will automatically renew for two years and so forth.  After five years, your one through five-year ladder will be on auto-pilot.

Why this strategy makes sense.  We are currently in a rising interest rate environment where I expect interest rates on CDs to be rising over the next several years.  If you invest your money today in this ladder strategy, twelve months from now, your 1-year CD will mature.  By reinvesting the money in a 5-year CD, you’ll be getting the highest interest rate across maturities of one through five years…meaning you’re ‘averaging-up’ your returns as quickly as possible.  Compare this to investing 100% of your money now in a 5-year CD and you’ll see, over time, you’ll collect much more interest using a laddering strategy.  Using a laddering strategy also has the benefit of giving you access to twenty percent of your money within a window of twelve months or less…just in case an emergency arises.

TIP- Getting the Highest Interest Rate

You’ll need to shop for the highest interest rates and make no mistake, the rates offered by banks can vary widely.  One great source is  Now you could shop to find the highest rate for each single maturity but you’ll have to spend a lot of time ‘managing the paperwork’.  My suggestion is to scan the highest paying CDs for one through five-year maturities and find one bank that is very competitive across all maturities.  That way you’re dealing with one bank not four or five banks.

TIP- Negotiate with your bank

Once you’ve done your homework, compare these rate to the rates offered by your own bank and ask them to match the rates you’ve found, if higher.  Your bank wants to keep your business, so some will be willing to offer competitive rates.

TIP- Beware of FDIC insurance limits

First, be sure the bank is insured by the FDIC.  If you’re investing large sums of money, make sure that your deposits are fully covered by FDIC insurance (ask the banker).  The current limit is $250,000 per depositor, per ownership category, per FDIC-insured bank.  For example, you could have $250,000 in your name plus $250,000 in your spouse’s name, plus $250,000 titled in both your names (joint title), for a total of $750,000 in the same bank and be fully insured.  Then you could do the same thing at another bank for a total of $1,500,000.