Laddering Certificates

Has your pulse rate been following the ups and downs of the stock market? If so, you may be more comfortable keeping some of your money in certificate accounts (also known as term share accounts at credit unions and certificates of deposit at banks). The dividends on certificate accounts are typically above the rate of inflation. Plus, when you consider real returns, the safety of your investment and the magic of compounding dividends, certificate accounts are definitely an investment strategy worth investigating.

Certificate accounts are federally insured up to $250,000, and your principal isn't at risk during the term of a certificate account. This is especially important if you need your money in the short term, for a major purchase such as college tuition, home improvements or an upcoming vacation. Certificate accounts let you plan your financial future with confidence because you know your return up front.

Many financial experts suggest staggering or laddering the purchase of short-term certificate accounts. You can build a system of guaranteed steady returns, as well as incorporate a certain amount of liquidity into the investment process.

Basically, laddering refers to buying certificate accounts with varying dates of maturity. For example, let's say you have $10,000 to invest. To establish a one-year ladder, you would put $2,500 each into: a three-month certificate account, a six-month certificate account, a nine-month certificate account and a one-year certificate account. That means you have a certificate account maturing every three months. Upon maturity, you would simply roll over each certificate account into a one-year certificate account to continue the pattern.

This system allows you to achieve a more consistent return on your savings. If rates move up, you'll be able to earn the higher rate on part of your money. And, if rates decline, only a portion of your money will be affected.

Remember, you always have the option of choosing a longer term certificate account to lock in higher returns. Here's an example of what your return would be using a laddering strategy versus a putting the full amount in a three-month certificates.

In this example, all funds are deposited for two years. Dividends are compounded daily. Rates shown below are for example purposes only. For current rates, visit our rates page.

Dividend rates remain the same for two years.

Dividend rates fall 0.50% for second year.

Dividend rates go up 0.50% in second year.

* The 24-month certificate rate remains the same for the full term whether market rates rise or fall. The certificates with the three other terms renewed at the new rate for the second year. For the 3-month, the rate change took effect for the 5th term. It took effect for the 3rd term for the 6-month, and the 2nd term for the 12-month.

You can see how laddering comes out ahead of a short-term certificate strategy in all three scenarios. The continual cycle of staggered maturity dates allows you to earn respectable returns no matter what market rates do.

If you'd like to learn more about DCU Certificate Accounts, visit our Certificates page.

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