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What Is Certificate Laddering, and How Does It Work?

certificate laddering

A share certificate is a type of savings vehicle that allows you to earn a higher APY (annual percentage yield) than a typical savings account, while locking up your deposit for a set period of time.

Banks have certificates of deposit (more commonly known as CDs), which pay interest, while credit unions have share certificates, which pay dividends. As a member-owned financial institution, a credit union can typically offer better rates than banks.

During the term of a certificate or a CD, you cannot touch your money without paying a penalty. In the meanwhile, you earn a fixed percentage yield which is given back to you upon the completion of the certificate’s term. The yield, often referred to as an APY, or Annual Percentage Yield, is a normalized compounding of dividends after one year. Term lengths vary and usually start at a minimum of 12 months, but the longer they are, usually the higher the yield.

If you’ve been wondering about certificate laddering and if it’s right for you, here’s the scoop.

A certificate ladder (or CD ladder, at a bank) is a savings strategy where you invest in several certificates with staggered maturities to take advantage of higher rates on longer-term certificates, while still keeping some of your funds accessible in the near term.

For example, if you have $3,000 to invest, you could divide the funds into 3 certificates with different maturity dates:

  • $1,000 into a one-year certificate at 2% APY
  • $1,000 into a two-year certificate at 3% APY
  • $1,000 into a three—year certificate at 4% APY

When the first certificate matures, you can use the funds to build your ladder by reinvesting them into a new three-year certificate with a higher yield. When the two-year certificate matures, you would open another with a higher yield, and so on and so forth. You may continue this process for as long as you’d like to keep laddering. Because you’ll be earning money in dividends or interest, you’ll have more to invest each time, especially if rates continue rising.

While laddering may be a great fit for your short-term savings goals, take the time to think about your reasons for starting a certificate ladder. If you may need access to your funds in the near future, a high-earning Money Market account could be a better option. If you are looking to earn more longer-term, you may want to consider other investment vehicles.

No matter what you decide, Service Credit Union is here for all your savings needs!