June 28, 2021Laddering: A Creative Strategy for Investing in Share Certificates
With so many investment options out there, one popular option is a certificate account. While banks often refer to these accounts as certificates of deposit or CDs, PEFCU refers to them as share certificates.
What are share certificates?
A share certificate allows you to invest your money for a specified time period (typically ranging from 1 to 5 years) of your choosing. During the term of your investment, you are not allowed to withdraw your money without incurring a penalty.
In exchange for having your money “locked–in” during your term, you’ll usually receive a higher dividend rate versus traditional savings accounts. Furthermore, share certificates offer guaranteed returns without risk since the National Credit Union Administration (NCUA) federally insures all accounts up to $250,000.
One fact that makes people hesitant about investing in share certificates is that they can’t touch the money they invest for the entire length of the term. If the money is withdrawn before the maturity date, there will be a penalty, which could be more than the interest earned. One way to get around this factor is by “laddering” your share certificate.
What is Laddering?
Laddering is an investment strategy in which a person will invest money in multiple share certificates over a variety of terms. For example, imagine you have $10,000 to invest. Instead of putting all your money in one 5-Year Certificate, you could put $2,000 in a 1-Year Certificate, $3,000 in a 3-Year Certificate, and the remaining $5,000 in a 5-Year Certificate.
Laddering allows you to gain access to some of the money in your certificate accounts sooner so that it can be reinvested or used however you see fit. If you put all your money into one 5-Year Certificate and rates dramatically increase in 3 years, you would have to wait 2 more years still to reinvest at these higher rates without a penalty. With laddering, you would already have funds maturing and able to take advantage of the higher returns.
How Much Should Be Invested in Different Ladders?
There is really no set amount. Each person will have their own financial goals and different level of funds available to invest. To make a smart decision, you should figure out the following:
- How much should you invest in each share certificate?
- What terms are ideal for you?
- What will the rate be?
- Do you have funds set aside just in case you need emergency cash?
It may be prudent to place a smaller amount of funds into certificate accounts and then create a separate emergency savings account that can be tapped into any time to cover unforeseen expenses. This method can lessen the risks of withdrawing the money out of the share certificate too soon and incurring a penalty.
Select the term lengths of your share certificate that best fit into your present financial situation as well as any future wealth goals. Then adjust your investments accordingly.
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Laddering share certificates is a great strategy to build wealth, take advantage of future rate increases, and prevent all your money from being locked up long-term.
Each individual’s financial situation is unique, and readers are encouraged to contact PEFCU when seeking financial advice on the products and services discussed. This article is for educational purposes only; It does not constitute legal advice. If such advice or a legal opinion is required, please consult with competent local counsel.