How to 'Ladder' to Maximize CD Rates

For those frustrated by abysmal rates but determined to stick with CDs, laddering can be a useful strategy to maximize returns without tying up all your cash for too long.

Here's how it works: Say you have $10,000 to invest. The rates on CDs with terms of 3 months to 30 months range from 2% to 3.25% -- better returns with more time, but still below inflation. Instead of locking up all your funds into the highest rate with the longest term, you put $1,000 in 10 different CDs with various rates and durations. You can roll over the short-term investments into new CDs once they expire, hopefully at better rates.

According to BankingMyWay.com's CD ladder calculator, you can earn $270 more over the two and a half years with laddering than you could by using a single CD.

While CD rates have come up from recent lows, the outlook hinges on whether the Federal Reserve will continue the rate-cutting campaign it began in September in an effort to lower the cost of borrowing. The cuts have also had an effect on inflation, which has accelerated to 4% from 2.8% a year ago. It's unclear how the Fed will strike a balance between loosening the credit crunch and easing the cost burden on consumers.

Laddering can be a "good strategy" to hedge against losing money to weaker rates or missing opportunities for better ones, says Christine Benz, Morningstar's director of personal finance.

"The price of safety has gone up," Benz says. "That's the risk in locking up too much of your assets -- you might not be able to capture better CD rates over the next few years."