What Is A Savings Certificate Ladder?

Saving for the future can be difficult, especially in a tumultuous economy. Did you know that there is a risk-free savings strategy that can help you reach your savings goals more quickly? A savings certificate ladder isn’t a “get-rich” scheme, but rather a guarantee that you will earn passive income by simply investing in the right certificates of deposits. Explore how.

Understanding Savings Certificates

The goal of a savings certificate is to build your savings over a period of time. A savings certificate is a type of savings account that has a fixed term, creating extra barriers to accessing your money, but offers higher interest dividends than traditional checking or savings accounts.

To open an account, you choose a savings certificate with a term and interest rate, and deposit a lump sum of money. Over the term of the certificate, your money will grow at the guaranteed interest rate. These funds are locked in until the end of the term to ensure you get the most out of the guaranteed rate. Terms can range from a couple of months to several years – whatever fits your needs! However, if you need to access the funds sooner, you can make a withdrawal with a penalty fee.

Utilizing A CD Ladder

A savings certificate ladder is a savings strategy where several certificates of deposit are opened with different maturity dates. The goal is to stagger the maturity dates so you can take advantage of higher interest rates while still having periodic access to portions of your money. Once a savings certificate matures, you can decide to do something with that money or reinvest it.

Pros

  • Savings certificates offer a fixed, guaranteed rate without the risk of the traditional investment market
  • Using the savings certificate ladder method, some of your money is available in a rotating term schedule
  • Your money is protected if you open savings certificates with an FDIC-insured bank or an NCUA-insured credit union, up to $250,000

Cons

  • If you need to pull your money out before a term is up, you will incur a penalty fee
  • Savings certificates are less aggressive than stock or bond investments, so you won’t get as much return on your investment
  • You have to track your maturity dates to avoid automatic rollovers with unfavorable terms

How To Build A Savings Certificate Ladder

  1. Choose the best credit unions in the area that offer the most competitive rates. The higher, the better – especially ones with little to no fees. You will also want to pay attention to the term lengths. The length of the term will tell you how long your money will be locked in and earning interest.
  2. Determine how much you are going to deposit. If you plan to deposit $3,000 total, split the amount evenly into the number of savings certificates you plan to use.
  3. To build a savings certificate ladder, choose several savings certificates with staggered term lengths. For example, choose a 1-year, 2-year, and 3-year term savings certificate. This may separate your money into different financial institutions, but as long as they offer the highest interest with the right term, it won’t matter.
  4. Your savings certificate ladder could look like this after you have made the investments.
    1. $1,000 in a 1-year savings certificate
    2. $1,000 in a 2-year savings certificate
    3. $1,000 in a 3-year savings certificate

After the first savings certificate matures in one year, you can choose to reinvest that money into a different savings certificate with higher interest and a different term, or you can take it and use it to reach your financial goals. However, if you choose to continuously reinvest the money, you will have a revolving door of money growing.

To build a savings certificate ladder today, start comparing rates in your area at different financial institutions!