How to Grow Your Money with Certificate Laddering

So you get how savings certificates work and think they might be a good fit as part of your wealth building plan. Now you’re deciding how long you want to save with terms ranging from 6 to 60 months. One strategy that has gained prominence for its simplicity and effectiveness is called certificate laddering. This method harnesses the power of compound interest while minimizing risk, providing a structured approach to wealth building. Here, we’ll explore the concept of certificate laddering (often called CD laddering), its benefits, and practical steps to implement this strategy successfully.

What is certificate laddering?

Building a certificate ladder, or CD ladder, is a savings strategy that spreads a lump sum of cash across multiple savings certificates to take advantage of higher rates — usually in long-term CDs or certificates— while freeing up portions of that money at short-term intervals.

Benefits of certificate laddering

This approach offers a balance between short-term accessibility and long-term growth potential. Let’s dive into what that means for you a bit more.

1. Risk mitigation: Laddering spreads out your investments across different maturity periods, ensuring a steady stream of income and accessibility over time.
2. Optimized returns: By investing maturing certificates into new ones with potentially higher interest rates, you capitalize on rising rates and optimize your overall returns. This proactive approach to managing your investments maximizes earning potential.
3. Flexibility: Laddering provides cash at regular intervals, allowing you to access funds when matured without penalties. Whether it’s for emergencies, major purchases, or investment opportunities, you have the flexibility to adapt to changing financial circumstances.
4. Simplicity: Unlike more complex investment strategies, savings certificate laddering is straightforward and easy to implement. With minimal maintenance and monitoring required, it’s an ideal option if you’re looking for a hands-off approach to building wealth.

How do you implement certificate laddering?

Before you get started, first assess how a certificate ladder approach aligns with your savings goals. Perhaps you already have an emergency fund set aside, and are using other savings strategies to build your wealth for various short- and long-goals. Thinking about the “why” behind your savings will help you determine the appropriate investment and timing.

Setting up a certificate ladder

To get started using a classic laddering strategy, you would open five savings certificates with maturities of 12, 24, 36, 48, and 60 months. When the shorter certificates mature, you can either keep the cash or reinvest it into a new 60-month certificate to take advantage of its higher rate.

For example, if you have $10,000 to invest, you could purchase five $2,000 savings certificates with the following terms:

• Certificate #1 for a 12-month term
• Certificate #2 for a 24-month term
• Certificate #3 for a 36-month term
• Certificate #4 for a 48-month term
• Certificate #5 for a 60-month term

When the 12-month certificate matures, you could roll it over into a new 60-month certificate, and then do the same as the 24-, 36-, and 48-month certificates mature.

In only four years, you will have a 60-month certificate maturing every year. That way, you have access to cash every year as a certificate matures but can take advantage of higher interest rates on 60-month certificates.

Certificate laddering can help you get the most out of your savings over the course of many years. And it can be repeated as often as you like.

How to open a VACU savings certificate

VACU offers our members access to a range of savings certificate products, with a range of terms and interest rates. Our minimum opening deposit is $500 for each. Our certificates compound their interest on either a monthly or quarterly basis, depending on the term length and amount invested. If you’re a member, you can add savings certificates to your account through online banking. If you’re new to VACU, you can begin by opening an account online as well.