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| Dave Rathbun |
 Posted: Tue Apr 12, 2005 8:57 am Post subject: Buying a Ladder |
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CFO
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I did a quick search, and nobody seems to have explained this concept yet, so I'm going to give it a go. Warning, I'm very wordy. 
One of the biggest drawbacks of investing in certificates of deposit (CD's) is that your money is locked away in a vault and there are often severe penalties for early withdrawals. One strategy is to purchase only short-term certificates, so your money is never very far away. But short-term certificates typically offer lower interest rates, so you pay a penalty anyway. The answer? A ladder. 
You can go about setting up a ladder in a couple of ways. If you need to invest your money all at once, you use one strategy. If you invest over time, you can use a different option. I'll cover both.
Hypothetical Case 1
I have $10,000 and I want it to be tied up for no more than 3 months. I can purchase a 3 month CD and let it roll over each time it comes due or I can withdraw the money. The cost? Lower interest rate.
Intead, I will take $2500 and purchase a 1 year CD. In three months, I will take $2500 more and purchase another 1 year CD. 3 months later? Another $2500 purchase. And finally, 9 months after my first purchase I get yet another 1 year CD. Now what do I have?
I have 4 CD's each with a $2500 investment. By purchasing a 1-year certificate, I got a better interest rate. But by purchasing them over time (on 3 month intervals) I will now have at least one CD coming due every 3 months, yet at the higher one year interest rate.  Cool stuff, right? If I don't need the cash, I let the CD roll over into another 1 year term. Yet I am never more than 3 months away from getting my hands on at least 1/4 of the cash. As each initial CD is renewed, I renew for one year. By the time the process is complete, I have four one year CD's, one coming due every three months.
Hypothetical Scenario 2
I have $10,000 that needs to be invested. I purchase a $2500 one year CD, a $2500 two year CD, a $2500 three year CD, and a $2500 four year CD. Once again, I have invested in four certificates instead of just one. Once again I am buying longer-term certificates in order to lock in higher rates. The biggest differences are that I am investing the entire amount all at once, and for a longer term. In this scenario I have to wait at least a year before I can get money out. As each CD comes due, I roll it over into a four year certificate, which will finally end up with me owning four CD's each with a four year term but with expiration dates only one year apart.
This concept is called a "ladder". Next time someone talks about this idea, hopefully you'll understand what it's about. |
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| Benjamin |
| Posted: Tue Apr 12, 2005 9:04 am Post subject: |
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Administrator
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Excellent post Dave. Explained very clearly, this is very useful information!  |
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| scampf |
| Posted: Fri Mar 03, 2006 7:44 am Post subject: |
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Investing Sr. Associate
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| Thank you for the info. I may be able to repeat it to someone and pretend I have some intelligance. |
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| scampf |
| Posted: Fri Mar 03, 2006 7:45 am Post subject: |
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Investing Sr. Associate
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| That sounded bad the way that came out. I mean, It's very clear what you are saying. Thank you. |
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| DKnightSr |
| Posted: Fri Mar 03, 2006 7:51 am Post subject: |
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Member of the Month
May
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| As Dave points out, CD's roll right over. Bonds on the other hand have to roll out before they can roll back in causing delays in investment... and losses of income. I just learned THAT one the hard way! |
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| mtptl1 |
| Posted: Wed Sep 01, 2010 5:17 pm Post subject: |
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Easy go to a fabrications shop and have them build one for you. A welding shop could do the same thing. Try farm fabricators, they tend to have the best skills because of the equipment they work with and the creativity level needed for their field.
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