It can be challenging to navigate financial solutions in today’s economic environment. Uncertainty and risk seem to be everywhere. The good news is that not all solutions are risky. Some are quite safe, such as SAFE certificates that lock in your money for a set period and generally pay higher dividends than savings accounts.
You can optimize your certificate savings using a technique called “laddering,” which lets you take advantage of good rates over time across multiple certificates. It may seem like a financial move from our grandparents’ era, but it can still be a smart tactic for today’s savers.
A Tale of Two Certificate Investors
One Certificate at a Time
Gina is a Sacramento area retiree who would like to invest some of her savings in a certificate. She wants to keep the money fairly liquid since she needs it for medical expenses (that darn runner’s knee keeps acting up!) and the occasional trip to see the grandkids. Gina has decided to invest in a certificate at her local credit union. She deposits $20,000 in a certificate with a three-month term. Every quarter, when the certificate matures, she plans to reinvest (roll over) the total. In this example, Gina is receiving a three-month rate. The general rule is that shorter-term certificates earn lower dividends than longer-term certificates. The upside is that she can access her money within three months if she doesn’t choose to reinvest it.
Laddering Certificates
Gina’s daughter Julie, on the other hand, isn’t retired. Her kids are starting to think about which colleges to apply to, and Julie is planning how to redecorate her kids’ rooms once she’s got an empty nest. Plus, there is a possibility that her mom will eventually move in. Julie knows she will need money that is easily accessible and will grow, so she decides to take a ladder approach with certificates. She invests $20,000, putting the first $1,000 into a five-year certificate and depositing the remaining $19,000 in a three-month certificate. At the end of the first quarter, she invests $1,000 in a second five-year certificate and rolls over the remaining $18,000 for another quarter. At the end of the next quarter, she again takes another $1,000 and puts it in another five-year certificate, rolling over the rest into a three-month certificate. Julie continues this pattern until the 20th quarter, (five years later) when all $20,000 will be invested in 20 different certificates, all with a maximum (five-year) maturity. Since her money is in certificates with longer terms, she is likely to earn a higher dividend rate on each one.
At the end of the 21st quarter, the very first five-year certificate will mature, and she has the choice to withdraw or roll over the money into another five-year certificate. From then on, Julie will earn the maximum certificate return on every one of her 20 certificates she’s laddered – and she’ll still have one maturing every quarter – just in time for those 2nd semester books for her son!
Laddering allows you to take advantage of higher rates and still have ongoing access to your money. Plus, your local credit union may also have great specials that offer the best bang for your buck, so make sure you check out their rates. SAFE has terrific options and competitive rates on certificates and other deposit products, all insured by NCUA.
(https://www.safecu.org/personal/grow-your-money)
Although laddering certificates might not bring you higher returns than investments like stocks, certificates come with far less risk. They can be an important savings tool to bring balance to your financial (and personal) life.
To learn more about SAFE’s personal banking and saving solutions, visit safecu.org, stop by a branch, call (800) 733-7233, or chat with a helpful SAFE representative today.
