Parallel CDs: An Alternative to Ladders

Building a CD (certificate of deposit) ladder is a common strategy investors employ to benefit from CD's high interest rates while still having access to their cash at set intervals. But setting up a ladder takes time and effort. Depending on how much money you're working with and the flexibility you need, another idea is buying parallel CDs - a few CDs set to mature at the same time -- instead of building an entire ladder.

What's the difference and how do they work? A CD ladder consists of buying multiple CDs with staggered maturity dates: one one-year CD, one two-year CD, and so on. As one CD matures you get access to some of your cash while the rest stays invested. You can roll it into another CD or invest it another way. Buying parallel CDs is a much simpler strategy: you buy several CDs with the same maturity date. If you need to withdraw, you pay a penalty, but the hit you take with the fee is minimized since your money is invested in multiple CDs instead of just one.

CD ladders work best for long-term investors, while parallel CDs make more sense for someone who can't commit to locking up all their money.

CDs offer relatively high interest rates compared to other types of deposit accounts. For instance, in New York, Citibank (C Quote) offers an interest rate of 2.4% on a $500 12-month CD and 1.01% on its $10,000 money market account. But the extra interest comes at a price: early withdrawal penalties.