====== CD Ladder ======
A CD Ladder (also known as 'Laddering') is a wonderfully simple yet effective investment strategy designed to manage your cash reserves. Instead of putting all your money into a single [[Certificate of Deposit (CD)]], you split it across several CDs with different, staggered maturity dates. Imagine a physical ladder: each CD represents a "rung" that comes due at a different time. For example, with $5,000, you might put $1,000 into a 1-year CD, $1,000 into a 2-year CD, and so on, up to a 5-year CD. This approach creates a steady stream of maturing CDs, giving you a beautiful blend of regular access to your cash (liquidity) and the higher [[interest rate]]s that longer-term CDs typically offer. It's a classic technique for earning more on your safe money without locking it all away for years on end.
===== Why Build a CD Ladder? =====
Building a CD ladder isn't about getting rich quick; it's about being smart, patient, and prepared. It’s a strategy that elegantly solves a few common problems for cash investors.
==== Juggling Yield and Liquidity ====
The fundamental dilemma with cash is this: to get a better return, you usually have to lock your money up for longer. A 5-year CD almost always pays more than a 6-month CD. A ladder lets you have your cake and eat it too. A portion of your money is always just a year (or less) away from maturing, giving you access if you need it. Meanwhile, the rest of your money is working hard in longer-term, higher-yielding CDs. You avoid the dreaded [[early withdrawal penalty]] because you simply wait for the next "rung" to mature.
==== Taming Interest Rate Risk ====
What if you lock in a 5-year CD and interest rates shoot up the next year? You're stuck earning a subpar rate. This is called [[interest rate risk]]. A ladder is the perfect antidote.
  * **If rates rise:** As each short-term CD on your ladder matures, you can reinvest that cash into a new, long-term CD at the new, higher rate. You systematically "climb up" to better yields.
  * **If rates fall:** You’re protected! The bulk of your money is still locked in at the older, higher rates from previous years. Only a small portion will need to be reinvested at the less attractive new rate.
A ladder smooths out the peaks and valleys, meaning you don't have to be a genius at predicting the future direction of interest rates.
===== How to Build a Simple CD Ladder =====
Let's walk through building a classic 5-year ladder with $10,000. It's easier than it sounds.
The goal is to have money maturing every year, while capturing the high rates of a 5-year CD.
=== Step 1: Divide and Conquer ===
You divide your total investment ($10,000) into five equal parts ($2,000 each).
=== Step 2: Build the Rungs ===
You then buy five different CDs, creating the initial "rungs" of your ladder:
  * **Rung 1:** $2,000 in a 1-year CD
  * **Rung 2:** $2,000 in a 2-year CD
  * **Rung 3:** $2,000 in a 3-year CD
  * **Rung 4:** $2,000 in a 4-year CD
  * **Rung 5:** $2,000 in a 5-year CD
=== Step 3: Maintain and Climb ===
This is the magic part.
  - **After Year 1:** Your 1-year CD matures. You take that $2,000 (plus interest) and reinvest it into a //new// **5-year CD**.
  - **After Year 2:** Your original 2-year CD matures. You take that money and buy another **5-year CD**.
  - **And so on...**
After five years, your ladder is fully built. You now own five 5-year CDs, with one maturing every single year. You are now enjoying the high yield of a 5-year term with the liquidity of a 1-year term. Brilliant!
===== A Value Investor's Perspective =====
For a value investor, managing the cash portion of a [[portfolio]] is just as important as picking stocks. A CD ladder aligns perfectly with the value investing philosophy.
First and foremost, it’s a tool for **capital preservation**. CDs are typically insured by government agencies (like the [[FDIC]] in the U.S.), making them one of the safest places for your money. This directly serves Warren Buffett's first rule of investing: "Don't lose money."
Second, it instills **discipline and patience**. It's a set-it-and-forget-it strategy for your safe money, freeing up your mental energy to focus on finding wonderful, [[undervalued]] businesses.
Finally, a CD ladder provides **"dry powder."** The regular stream of maturing cash gives you liquidity. While you'll often reinvest it to maintain the ladder, having that cash available means you are always prepared. If the market panics and offers you a brilliant company at a silly price, you have the ready funds to act decisively. A CD ladder ensures your opportunity fund is safe and earning a respectable return while you wait for the perfect pitch.