Ladder Your Money

The best way to maintain the liquidity of your savings, boost yield and protect yourself against rapid rate changes is to stagger the maturity dates of your CDs.

Sometimes called "laddering," staggering maturities is really a form of diversification. You spread your money over several different maturities: say, one-fourth of your CD funds in certificates maturing in three months, one-fourth in CDs maturing in six months, one-fourth in CDs maturing in a year and one-fourth in CDs maturing in two or three years. (A profitable rule of thumb based on the history of interest-rate movements: If five-year CD rates ever reach 10% again, stock up on them.)

Normally, longer maturities pay more interest, so why not just concentrate on those?

In fact, that would be a splendid strategy if you could accurately predict the direction of interest rates and your prediction was that they were going to fall. But what if they rise?

By staggering your maturities, you have protected yourself in either case. If rates rise, your short-term CDs will mature in time for you to reinvest the principal at the new, higher rates. If rates fall or stay flat, you'll be sitting pretty because you've locked in the current two- or three-year rate. By the time those certificates mature, rates could well have turned in the other direction again.

If you're willing to sacrifice some of your yield for a little less work, consider either money-market mutual funds or money-market deposit accounts. But before we look at these accounts, let's take a closer look at the money market itself.