Spring is here and so are great rates on Share Certificates!
Now is a perfect time to take out multiple certificates to accumulate savings in a safe environment. Other great benefits include:
- Maintain access to your savings
- The rate of your certificate is locked in
- Potential to earn more with a long-term rate than reinvesting at a short-term rate
When building your certificate portfolio, the type of certificate you choose matters. Know your options. Certificate ladders can contain several types of certificates from simple to rate-jumping. Understanding how each can benefit you will assist in creating your strategy.
A “classic” ladder involves buying several certificates that mature at different times, rather than a single long-term one. With this ladder, you can benefit from higher rates while retaining your flexibility.
To build a classic ladder like the example below, first, open four shorter-term certificates and a long-term certificate. Then, reinvest the proceeds from the shorter-term certificates each year into a long-term certificate to extend the ladder. In five years, you will have all long-term certificates with one maturing each year. It’s that simple!
A $10,000 classic ladder might look like this.
- $2,000 in a 12-month certificate
- $2,000 in a 24-month certificate
- $2,000 in a 36-month certificate
- $2,000 in a 48-month certificate
- $2,000 in a 60-month certificate
A “tree” certificate ladder involves buying varying amounts of certificates with different maturity dates. With a tree ladder, you can benefit from a constant liquid cash stream while waiting for the lump sum to mature.
This is a smart option if you will benefit most from having a large sum in a high-rate, long-term certificate, but do not want to tie up all your savings for that long. A high yield money market (HYMM) account can serve as the catchall account for the transfer of external funds, dividends, and cashed-out certificates.
To build a tree ladder, as shown below, open four shorter-term certificates, a long-term certificate, and a HYMM. Each should contain enough savings to last until the next certificate matures. You have two choices when it matures: deposit it into the HYMM or allow it to roll over. Either option creates a liquid source of funds that can be used without the risk of incurring a withdrawal penalty on the funds in the long-term certificate. In five years, you will have access to the long-term certificate and can set up another tree ladder.
A $10,000 tree ladder might be spread out like this.
- $500 in a 6-month certificate
- $500 in a 12-month certificate
- $1,000 in an 18-month certificate
- $1,000 in a 24-month certificate
- $7,000 in a 60-month certificate
Target Date Ladder
If you do not have a large initial investment, a “target date” ladder might be for you. This ladder involves buying several certificates that start at different times, but mature at the same time: the target date. This strategy works best when saving for a large purchase, such as a car or house, where you will need a large sum at once.
With this ladder, you purchase a long-term certificate first, and then two years later purchase a shorter-term certificate with a maturity date that matches the original. Purchase another certificate 18 months later, etc. to complete the ladder. All certificates will mature at the same time.
When a target date ladder matures, you can maximize your gains one of three ways:
- Roll them together into one certificate
- Add the proceeds to another certificate during its grace period
- Put the cash into a high-yield money market account to make your purchase
A $10,000 target date ladder might be spread out like this.
- $3,000 in a 60-month certificate
- $2,350 in a 36-month certificate
- $1,900 in an 18-month certificate
- $1,750 in a 12-month certificate
- $1,000 in a 6-month certificate