Ever felt like opening a long-term savings account and interested in reviewing your options? Let us tell you about something called a CD ladder and whether it's a good choice.

A CD ladder, known as a certificate ladder when opened at a credit union, is a savings tool that combines the security of share Certificates with the flexibility of staggered maturity dates. Let’s take a closer look at certificate ladders and why this may be an excellent choice for your funds. 

What is a Certificate ladder?

Certificates of Deposit (CDs) have been a longtime, popular investment banking tool for individuals seeking a safe and stable place for their funds. Their credit union counterparts, share certificates, are the same type of product, so don’t let the terminology differences trouble you. They offer a fixed earnings rate over a specified period (term), and provide a reliable source of income. However, traditional certificates often lack flexibility since investors must commit their funds for the entire term. This is where certificate ladders come in.

Certificate ladders operate on a simple principle: instead of investing in a single certificate with a fixed term, savers distribute their funds across multiple certificate accounts with different, staggered, maturity dates. For example, instead of investing $10,000 in a single 5-year certificate, a member may choose to allocate $2,000 to five different certificates, each with a maturity date of one year apart. This strategy creates a “ladder” of certificates, with one maturing each year.

What are the advantages of Certificate ladders?

There are several significant advantages of certificate ladders: 

• Increased flexibility. The primary advantage of certificate ladders is their flexibility. By staggering the maturity dates, savers have access to a portion of their funds each year instead of tying up their savings for one long duration. This feature is especially beneficial in an environment of rising rates, as it allows investors to reinvest a portion of their funds at higher rates. Conversely, in a falling-rate environment, it offers protection by ensuring that a portion of the funds stay locked in at higher rates instead of seeing it all renew at lower rates, which means less earning potential.
• Liquidity. These ladders provide a level of liquidity that traditional certificates lack. Investors can access a portion of their invested funds without incurring penalties in the event of an emergency or an unexpected financial need. This liquidity offers peace of mind and a safety net that can be especially attractive to conservative investors.
• Yield curve advantage. Another benefit of certificate ladders is the ability to take advantage of the yield curve. The yield curve is the relationship between the interest rates and the maturity dates of fixed-income securities. Typically, longer-term certificates offer higher dividend rates than shorter-term certificates to compensate for the additional risk. By creating a ladder with varying maturity dates, investors can enjoy the potential benefits of both short- and long-term rates.
• Lower reinvestment risk. Certificate ladders allow investors to manage the reinvestment risk. Reinvestment risk refers to the concern that, when a fixed-income investment matures, the available rates may be lower than the original investment’s rate. With a certificate ladder, investors can mitigate this risk by reinvesting a portion of their funds each year. If rates decline, only a fraction of the portfolio is affected, thus minimizing the overall impact.

What are the disadvantages of a certificate ladder?

Despite its many advantages, certificate ladders are not a suitable choice for all investors. First, each certificate within the ladder has a fixed term. This means early withdrawal penalties may still apply if funds are accessed before a certificate’s maturity date. Additionally, the rates offered on certificate ladders may not be as high as those on riskier investments, like stocks or bonds. As a result, individuals with a higher risk tolerance, as well as those seeking significant growth, may prefer other investment options.

Certificate ladders provide a compelling blend of flexibility, security and liquidity. Use this guide to make an informed decision about investing in a certificate ladder and give your money its best chance at growth. 

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If you have questions about Eagle Community Credit Union, we’re ready to help. Please stop by any of our convenient branch locations or call (949) 588-9400 to speak with a team member today.

Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.