Investing in a certificate of deposit is one of the safest investments you can make as long as you keep your account deposit below $250,000. CD Rates are not earning that high of an interest rate right now but that will change. This is the  maximum amount that the Federal Deposit Insurance Corporation (FDIC) will insure against if the bank issuing the certificate of deposit fails. You also need to factor in any intest the certificate of deposit earns.

Here is an example. Say you invest $250,000 into a 5 year certificate of deposit. Let’s also say the current 1 year yield is 10%, wishful thinking I know. The return at 10% for a year would be $25,000. Let’s also say the day before your certificate of deposit matures the bank fails. Your principal deposit of $250,000 will be insured but the $25,000 would be lost.

If you’re one of the lucky few that has more than $250,000 to invest in a certificate of deposit you don’t have to run around town or open up CDs online at several banks. There is a service called the Certificate of Deposit Registry Service (CDARS) that you can use to open CD accounts and have up to $50 million in FDIC insurance coverage. You just deal with one bank and your deposits are spread across as many banks as needed to stay within the $250,000 limit.

If you’re thinking about investing in CDs and interest rates are heading higher there is a strategy you can use to enjoy higher CD rates while having CDs mature annually. Certificate of deposit laddering is an investment strategy used when interest rates are going higher. When investing in certificates of deposit you’ll find the longer the certificate of deposit term, the best the CD rate usually is. Sometimes the yield curve is inverted which will lead to longer term rates being lower than shorter term rates.

When you ladder a CD invest the same amount of money in several different CD terms over a period of several years. The end result when investing in a ladder is you have all your money in longer term CDs earning a higher CD rate but you also have CDs maturing every year.

Here is an example of a certificate of deposit Ladder. Let’s use a three year strategy with $60,000 for this example. The investor deposits $20,000 in a 3 year certificate of deposit, $20,000 in a 2 year certificate of deposit and $20,000 in a 1 year certificate of deposit.

After year one, the 1 year $20,000 certificate of deposit matures, the depositor then invests the money in a 3 year certificate of deposit. After year two, the secondr $20,000 certificate of deposit matures and the depositor invests in another 3 year certificate of deposit. After two years all funds are invested in 3 year certificates of deposit at a higher interest rate.