The sleep easy approach to investing is naturally saving your money and investing in low risk certificates of deposits, better known as CD‘s.
Most financial institutions sell CD’s and it is a reasonable good low risk way to save money and earn a better than average interest income on your savings. The advantage of investing in CD’s are their simplicity. CD’s are nothing more than a restricted savings account. Banks and Credit Union’s offer higher interest rates for customers to invest in CD’s.Many people however need to understand that for the higher interest earnings the account will be restricted from withdrawal for a pre-determined period, usually 6 months to 1 year. Although, there are CD’s with periods between 1 month to over 5 years, the most popular are of the 1 year variety.
Using CD’s or share certificates can get very lucrative for a investor with discipline, patience and determination. As mentioned above there are many possibilities to structure a steady stream of income in the form of interest overtime if one is willing to use a method called “Laddering”.
Share Certificate Laddering
Share Certificate Laddering, as most credit unions termed them, lets you put most of your money in higher-yielding share certificates, while never being more than a year away form access to part of your investment.
If you want to earn a higher dividend rate without locking all of your money into one long-term account, consider laddering your Share Certificates. With laddering, you simply open multiple fixed-rate accounts with staggered maturity dates and then reinvest your earnings. This strategy allows you to maximize your earnings, keep a portion of your money accessible, and take advantage of possibly higher dividend rates as the certificates mature.
How Laddering Works
You start the ladder by opening several Share Certificates with different maturity dates--for example, one-year, two-year, three-year and four-year certificates. Every year, when one of your share certificates matures, roll it into a new certificate with the longest term /9in this example, a four-year share certificate). But you are never more than a year away from access to part of your investment.
Imagine you have $20,000 to invest, but you are concerned about keeping it tied up for an extended period of time. In the laddering example in the chart, as certificates mature each year, you reinvest into a new longer-term certificate. (For maximum results, when the 12-month certificate matures, you will roll it over into a new 48-month certificate, and so on.)
To some investors, this method seems an unexciting and slow way to build wealth. A book that covers this topic well is the “automatic millionaire”, by Bach. Suffice it to say, one can become an automatic millionaire with just using this simply method of investing; however, as you know if you are a regular reader of money fools, risk and return most often has an inverse relationship…low risk, low return. In the end though this is a great way to start building a nest egg or on the other hand create a sleep easy portfolio.