Do you love the safety of a savings account, but want a better return and just as much security? You can have both by purchasing a series of certificates of deposit or CDs with staggered maturity dates. Many credit unions call them share term certificates or share certificates. Learn more about the benefits of building a CD ladder and if this type of long-term savings is right for you.
How it works
A CD ladder can be set up through a credit union using share term certificates (STCs) or with CDs from a bank. They are available in maturities ranging from three months to over five years. You can buy short, intermediate and long-term certificates that mature at staggered dates. On paper, this looks like steps on a ladder. Each new step features a CD with a longer maturity and higher interest than it had before.
For example, here is what it would look like if you were to invest $2,000:
- A $400 one-year certificate earning 1 percent
- A $400 two-year certificate earning 1.25 percent
- A $400 three-year certificate earning 1.5 percent
- A $400 four-year certificate earning 1.75 percent
- A $400 five-year certificate earning 2 percent
Each year a certificate matures. You can either put the money back into a five-year certificate or use the funds. If you choose to save, after four years, you’ll own five certificates totaling $2,000 ($400/certificate x five years = $2,000) and earning 2 percent interest.
Why build a ladder?
In addition to earning a higher interest rate than traditional savings, you don’t tie up all your money. This means you are never more than a year away from at least some of your cash if you need it. So if interest rates rise, you’ll have cash to take advantage of potential investment opportunities. Then, if rates fall, you’ve still got money invested for the long-term at higher rates. Plus, your money is federally insured.
A ladder is also useful to fight the temptation to spend. Most early withdrawals result in penalties. You’ll think twice about taking your money out before the certificate matures. Another benefit is you can create your own calendar of dividends (also know as interest) payments, which is useful in retirement. You can stagger your certificate maturities in such a way you receive maturities and dividends monthly, quarterly or longer.
Build a CD ladder to earn more from your savings dollars.
Article provided by Local Government Federal Credit Union.
The advice provided is for informational purposes only. Contact a financial advisor for additional guidance.