What is a CD ladder?
It’s not a stack of music CDs piled up in the corner (even though that’s what I always visualize). Instead, a CD ladder is a way of spreading out the maturity dates of your investment CDs so that you have one maturing every year (or other time period, depending on how you want to set up your ladder.)
There are basically two ways to create a CD ladder. You can buy several CDs at once in equal amounts, and have each of them mature at different dates. (One would mature in one year, another in two years, and so on.) Then as they mature, you reinvest to continue the ladder. Or, you can just buy a CD at fixed intervals and ensure that the maturity dates are far enough out that you eventually have one maturing every year. (Which you could then reinvest, in addition to keeping to the schedule you’ve set for yourself.)
The idea is to take advantage of varying interest rates over a period of time, with the result that you (ideally) earn a higher average interest rate overall than you would have if you’d just bought one big CD upfront or if you had tried to time the interest rates by figuring out the “ideal” time to invest.
