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Savers everywhere are rejoicing as interest rates continue their upward trend. There’s nothing better than earning higher returns on your money. One of the most potent saving tools right now is a Share Certificate Account, commonly called a Certificate of Deposit.

These accounts allow you to earn significantly higher dividends than traditional savings accounts. However, many members are reluctant to lock in their funds because they fear they will miss out on even better rates down the road. So, how can you maximize your investment returns now without sacrificing higher rates in the future? It’s a unique strategy called certificate laddering.

certificate laddering infographic

What is a Share Certificate Account?

A share certificate account (or certificate of deposit) is a type of savings account where your money is locked in for a designated timeframe or term. You cannot withdraw your money from this account during your term without incurring a penalty. In exchange for locking in your funds, you earn significantly higher interest or dividend rates than traditional savings accounts.

While each financial institution will have its certificate terms and rates, they will typically be displayed in a chart. Generally, longer-term certificates earn better returns. But what if you’re afraid rates will jump right after you open your certificate? To combat this fear, consider certificate laddering.

What is Certificate Laddering?

Certificate laddering is an investment strategy where you use a variety of certificate terms to keep your money partially liquid. The best way to explain this concept is through an example.

Imagine you have $15,000 you want to invest. Typically the longest terms offer the highest rates. However, you’re reluctant to lock in your money for a long period for several reasons:

  • You plan to go on a vacation in two years and want to use some of this money to pay for it.
  • You believe interest rates will continue to increase over the next couple of years – leading to higher returns if you wait.
  • You don’t want all your money locked up in case you have a financial emergency.

To combat these scenarios, you can ladder or stagger your certificates. Instead of investing all $15,000 into one 5-year certificate, your investments could look like the following:

  • $5,000 in a one-year certificate
  • $2,500 in a two-year certificate
  • $1,500 in a three-year certificate
  • $2,000 in a four-year certificate
  • $4,000 in a five-year certificate

Your investments could be any mix of certificate terms available, but this example shows how laddering works. Even with shorter terms, certificates tend to offer greater returns than other savings options, such as savings or money market accounts.

This strategy allows you to have multiple maturity dates so that money is always available annually. If rates increase, you can roll over the investment into a higher rate once it matures.

Advantages of Certificate Laddering

Laddering certificates is a tactic used regularly by savvy investors seeking higher returns while maintaining flexibility with their funds.

  • Liquidity: Instead of locking up your money long-term, laddering gives you access to a portion of your funds annually. Once a certificate matures, you can either roll over the investment into a higher-rate certificate, withdraw the money, or invest in another medium, such as the stock market.
  • Planning: Certificate laddering provides an easy way to organize your money based on financial goals.

You can open a certificate for each financial goal based on your timelines. Certificates are great tools because they lock in your money – forcing you to save.

  • Higher Returns: The economy constantly fluctuates, and you don’t want to miss out on higher interest rates in the future. By laddering your investments, portions of your money can become available annually – allowing you to lock in higher rates upon maturity.
  • Diversification: Certificates are a more conservative investment tool used widely by investors for portions of their portfolios. Because your money and rate are locked in for the term, certificates can help protect you against economic downturns where interest rates suddenly drop.
  • Guaranteed Returns: Certificates offer guaranteed returns, unlike the stock market, where you can lose money. Your certificate will earn the rate designated throughout your term. Plus, your account is privately insured up to $250,000 by American Share Insurance, with no limit on the number of accounts.

We’re Here to Help!

When interest rates are climbing, investors might be hesitant to lock their money in longer-term certificates. However, laddering allows you to earn greater returns now, with the opportunity to cash in on better rates down the road.

If you have questions about laddering certificates or would like to discuss this unique strategy with a team member, we’re ready to help. Please stop by any of our convenient branch locations or call 1-800-531-8456 today.

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Each individual’s financial situation is unique. We encourage you to contact United Texas Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.

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