When you deposit money into a certificate, you usually cannot touch it until it matures, which may take anywhere from three months to five years. But you can gain the benefits of certificate savings in a shorter time frame. Using a ladder, you can withdraw money at regular intervals, giving you short- and long-term options. Plus, certificate laddering lets you take advantage of fluctuating dividend rates.
What Is a Certificate Laddering Strategy?
Certificate laddering means investing in several certificates that mature at different times. It’s the best of both worlds. You enjoy higher dividend rates for longer-maturing certificates but get your other funds in a shorter time frame. When a certificate matures, you can liquidate it and put the money toward something you have been saving, like buying a new home or car, or you can roll that money into another certificate, extending your ladder.
How to Create a Certificate Ladder
To create a ladder, you divide a sum of money among multiple certificates. Each certificate is a new ladder rung. You could build a three-rung ladder by putting $500 each into six-, 12- and 18-month certificates, for example, or you might put more money in the certificates with the longer maturity dates. The idea is to have certificates maturing at regular intervals.
Why Should You Build a Certificate Ladder?
Building a ladder offers flexibility for your investments. You can pull out money while keeping some in reserve in the still-maturing rungs. Plus, you have no risk of losing your money.
Are Laddering Certificates Worth It?
Like any savings strategy, laddering certificates have benefits and drawbacks.
Some of the benefits include:
Earning a guaranteed return rate.
Making a low-risk investment.
Cashing in on rising rates when certificates mature allows you to move the money into a certificate with a higher dividend rate.
The drawbacks could include:
Receiving lower returns than other, potentially more volatile, investments.
Paying a penalty if you access your money early.
If a certificate matures when rates fall, you may get a lower rate on your next ladder rung.
What Is an Example of a Certificate Ladder?
Say you have $5,000 to invest. A certificate ladder approach might look like this:
$500 in a six-month certificate at 0.8% annual percentage yield (APY)
$750 in a 12-month certificate at 0.85% APY
$1,000 in a 24-month certificate at 1.15% APY
$1,250 in a 36-month certificate at 1.3% APY
$1,500 in a 48-month certificate at 1.4% APY
After six months, you can liquidate your first certificate or reinvest the money in a 48- or 60-month certificate, further extending your ladder. Then, you can reap the dividends of the maturing certificate every year, and each time you can decide whether to reinvest. Those extra savings add up over time, whether you are saving up for a vacation or a vacation home.
Learn more about our certificates and start laddering today!