Investment Strategies With $10,000 or less #1: CD Ladder

By Mike

cd ladder

Being a Financial Planner, I am always discussing different investment strategies with clients and colleagues. I would say that we are all tempted to think that the most profitable and easiest strategies are for rich people. We may think that we could be making much more money with $100,000 to invest rather than $5,000. However, there are methods for small investors that can almost replicate the best investment strategies of the rich.

In order to reach the $100,000 mark, we all have to start somewhere. You may think that you don’t have much to choose from if you have a small amount to invest but you are mistaken. There are ways to invest that can optimize your portfolio even if you are a small investor.

#1 CD Ladder

If you don’t want to risk your investment or are looking for a part of your portfolio to be safe, you don’t need a big amount invested to create a CD Ladder. Certificate of deposits are usually available starting at the amount of $500 or $1,000 depending on the product you select.

We call it a ladder because we select terms from 1 to 5 years. So the total capital required for this strategy is a minimum of $2,500. So you invest your money as follows (please note that investment yield is for example purposes only):

$500 in 1 year term at 1.50%

$500 in 2 year term at 2.00%

$500 in 3 year term at 2.50%

$500 in 4 year term at 3.00%

$500 in 5 year term at 3.50%

I put the Certificates of deposit in different colors for a specific purpose to follow.

While having money invested for 1 year at 1.50% may not be very interesting compared to the 3.50%, this will actually provide you with liquidity to invest next year if the rates goes up. At that time, you will invest your $500 in a 5 year certificate of deposit. Why? Look at the color of your certificate of deposit after 1 year:

$500 maturing and being deposited in your bank account (from your 1.50% certificate of deposit).

$500 maturing in 1 year at 2.00%

$500 maturing in 2 years at 2.50%

$500 maturing in 3 years at 3.00%

$500 maturing in 4 years at 3.50%

So you are left with an empty spot in the 5 year maturity area. What is the good news about 5 year certificates of deposit? They offer a bigger yield than  shorter terms! Therefore, after the first year you implement this strategy, you will always be taking 5 year certificates of deposit with the highest yields on the market!

Author: Mike.

Image source: Robert Couse Baker

3 Responses (including trackbacks) to “Investment Strategies With $10,000 or less #1: CD Ladder”

  1. Mrs. Money Says:

    CD laddering was awesome a couple years ago. I remember when rates were like 5.40! It’s still a good idea, but I’m just not as enthusiastic now. ;)

  2. Financial Samurai Says:

    I really think this is the wrong strategy. You should also invest in the longest duration CD as possible for yield maximization.

    “The Only CD Strategy To Employ For Maximum Return” Enjoy and make more than others!

  3. Mike Says:

    @Mrs. Money,
    Yeah I know, the rate are awful right for anything that is called “safe investments”. However, it is still the way to go.

    @Financial Samurai,
    I just read your post and you are saying exactly the same thing. Except, you go the other way by buying 5 years CD each year. However, you don’t start your ladder until 5 years instead of having it in place right away and you assume you will have the same amount of cash to invest in a 5 year every year.

    I you have had CD’s maturing in 2003, 04, 05, 06, 07 and 08, the only “low interest” CD you would get is the part maturing in 08. Then again, if rates are to go up in the next 2 years, your 04, 05 and 06 will come at maturity and you will be able to benefit from another 5 years CD at a better date.

    The human is a creature of habits. I prefer starting the ladder right away and create the habit of renewing CD’s every year. So if next year you don’t have money to invest, you will still be able to benefit from better rates.