One strategy to take advantage of the interest rate upswing is to purchase several multiple-term CDs, also known as CD ladder.
Suppose you have $5,000 to invest. You would purchase a $1000 1-year CD, a $1000 2-year CD, a $1000 3-year CD, a $1000 4-year CD, and a $1000 5-yr CD. As each CD matures, you would renew it for the new 5-year CD. This way you will always lock up at the highest interest rate.
Let’s take a look at a real example with ING DIRECT’s CDs:
1 Year 3.60%
2 Year 4.00%
3 Year 4.15%
4 Year 4.25%
5 Year 4.35%
If you do a CD ladder with equal amounts for each of the years, your average interest rate would be 4.07%. This is higher than the 1-year CD and more flexible than the 5-year CD alone. With a CD ladder you will have a CD maturity every year and you can take that money out if you happen to need it during that time.
CD ladder is a great strategy to participate in the highest yields as interest rates go up.