I generally prefer to invest my money in bacon chili cheeseburgers and 10-pairs-for-$3 socks, but I’m fascinated by all of the other ways there are to invest that can actually generate income. People try to grow their cash through buying gold they never actually see and hog bellies from the future and with insurance policies on other people’s investments. I’ve recently learned of another investment strategy I hadn’t heard of called CD laddering. From what I understand it’s safe (though comparatively low returning) and is gangbusters for people living on fixed incomes, since it generates predictable, dependable cash flow.

Investing in certificates of deposit (CDs) is about as close to a sure bet as you’ll get when you give your money to other people, since like savings and checking accounts, CDs are guaranteed by the Federal Insurance Deposit Corporation (FDIC). Back in the day, before the bailout, the FDIC insured accounts up to $100,000; since then the federales have temporarily extended the guarantee to $250,000 and in May continued the extension until December 31, 2013.

CDs are offered with differing maturation dates (when you get your money back, plus interest), between three months and five years. Usually the five-year CDs offer the highest rate of return. So you’re about to rush right out and park $50,000 in a five-year CD … no, stop that. When you take out that five-year CD, you’re locked into the rate, no matter whether interest rates rise or drop. This is where CD laddering comes in.

Take that $50,000 and divide it into $10,000 increments, invested in one, two, three, four and five-year CDs. As the one-year CD matures, take the money (and pocket the interest as income) and roll it into a five-year CD. So at any given time, you’ve got a five-year CD outstanding, four other CDs of descending maturation dates, with one always maturing this year. It’s kind of like an assembly line of your money coming back to you with a little extra attached. You carve off the extra and put the principal investment at the back of the line. CD laddering can also be done on a quarterly basis, using CDs that mature in three-month rather than annual increments.

The big draw is that you know how much income you’ll make each year based on the interest rate the CD that’s maturing offered when you invested. And while some years you’ll see higher interest rates than others, you’ll be more likely to run into higher interest rates during each five-year period you’re annually rolling your $10,000 increments over than you will if you’re only rolling over one $50,000 chunk every five years.

I may discontinue my bacon chili cheeseburger investment strategy in favor of CD laddering instead.

(Thanks to Chris Jones at the Motley Fool for helping get this through my thick skull.)

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