Certificates of Deposit, also referred to as CDs, are thought by many people to be a highly stable way to invest your money. Many certificates of deposit are offered by reputable banks, and in the United States most CDs are insured in accordance with the requirements of the FDIC. Sounds good so far, but one of the least appealing qualities of CDs is that your funds are untouchable in the bank for a certain length of time, known as the "term". If a depositor attempts to withdraw their funds before the term is concluded, then they can be required to pay large penalties for the early withdrawal. While a person might be inclined to select shorter term CDs, often you will see 4 year or 5 year CDs (and sometimes longer) with the highest CD rates. So how does a person get the best CD rates found in long-term CDs while keeping some flexibility just in case you need to access your funds sooner?

The answer to this riddle is the use of a CD Ladder. The idea behind the Laddering of Certificates of Deposit is, simply put, merely dividing the portion of your portfolio dedicated to CDs among several CDs of different term lengths.

For example, if you had $60,000 to invest in certificates of deposit, and you wanted to be certain that you were never more than one year away from being able to access at least $20,000, then you could buy three $20,000 CDs of different term lengths. In such a case, you might buy one CD with a one year term, one CD with a two year term, and one CD with a three year term.

Using staggered terms means that the investor is always within a year of grabbing a "rung" on the ladder. Thus, when the one year term CD is expiring, if you are not yet ready to withdraw your funds you are able to instead buy a 3 year certificate of deposit and still have your CDs staggered in the same way - because your 2 year Certificate of Deposit would now only have one year left, and your 3 year CD would now only have two years left. You may reconsider your needs each time a certificate of deposit comes up for renewal. Another important aspect of CD Laddering is that it keeps all of your money from being tied into one interest rate, and instead enables you to reinvest each terminating CD at higher rates if the market rates are on the rise.

This laddering technique can be tailored to fit the certain amount of money that you desire to invest and the length of time that you are comfortable being without access to a portion of your funds. Therefore, if the stability of a certificate of deposit and the flexibility of staggered terms appeals to you, then you should talk with your financial advisor to find out if a CD Ladder is a good investment for you.