Manage your CDs

In these days of historic low interest rates, it’s hard to earn much on certificates of deposit. It is probably best to not lock all your cash investments in longer-term CDs at very low rates.

One approach to consider is to do a “ladder” of CDs. That will spread the maturities out. That can result in more interest earned as time goes by.

A “ladder” also can help get higher interest earnings if rates finally go back up (as we all hope and expect they will – someday).

Instead of buying one big CD, consider buying four smaller ones. For example, instead of investing $40,000 in one CD, what if you:

  • Bought a $10,000 CD that matures in six months;
  • Bought another $10,000 CD that matures in one year;
  • Bought yet another $10,000 CD that matures in 18 months;
  • Finally bought another $10,000 CD that matures in two years.

Then, when the six month CD matures, buy a $10,000 CD that matures in five years. That will have a much higher interest rate than the one for six months.

Later, when the one year CD matures, buy a $10,000 CD that matures in five years.

That will have a higher interest rate than the one for one year.

Likewise, for the 18 months and two year CDs, buy the longer-term (five-year) CDs each time.

Eventually, you end up with four CDs all for five years, probably with higher interest rates and more interest income in the long run.

An alternative is to extend the ladder from four purchases now to maybe six. The goal is to not have a single five-year CD you bought now at today’s low rates.

A lot has been written about how we will have more inflation (and higher interest rates) in the future. But no one knows when.

A “ladder” approach to investing in certificates of deposit might be a way to earn more interest in the future, as rates increase (as they are expected to do).

Our government’s reports of inflation rates leave a lot to be desired. What goes into the computation and what doesn’t makes a difference in the reported rate of inflation.

Did you hear, “Admitting you’re wrong is like saying you’re wiser today than you were yesterday.”

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser serving Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs, LLC.