Get Your Green On

Put your tax refund to work—start a certificate ladder

With interest rates expected to rise this year, now is a great time to get your savings in order, and certificate laddering can help you get the most out of your money.

For any emergency savings plan, having quick access to your cash is key. Typically, that means that money is kept in a share savings or money market account for ready access. But with the laddering technique for share certificates (at a bank, these are known as ‘certificates of deposit’ or ‘CDs’), you have monthly access to your money PLUS the added benefit of the higher interest rates that certificates provide.

First off, what’s a Share Certificate?

Share certificates are like a savings account where you can’t withdraw the money for a certain period of time. In return for agreeing to keep your money in a share certificate for a longer period of time, your financial institution pays you a higher rate of return. (If you want to withdraw the money before the end of the certificate’s term, you will pay a fee.)

What’s a certificate ladder?

Certificate laddering is a simple concept: Divide the amount of money you have to save among certificates that mature at different intervals. As each certificate matures you can turn it over into a longer maturity certificate. In time, all your certificates will be earning a higher yield with a longer maturity. Because you have a CD maturing regularly, you can always cash it in if you need.

How do I get started?

A common CD ladder would be as follows: If you have $1,500 to invest, deposit $500 into a one, two, and three-year certificate. Each year when a certificate matures, roll the principle ($500) plus the dividends (interest made over the year, which varies depending on the interest rate) into a three-year certificate for a higher-dividend yields. Continue each year as your certificates mature and reinvest them into a three-year certificate so all your money is earning a three-year rate.

If you’re just getting started, you might commit (to yourself) to fund one 12-month certificate each month for three years. At the end of that time, you will have a collection of 36-month certificates with one certificate maturing each month for 36 consecutive months. Here’s how you would set that up:

  • Year 1: Fund one 12-month certificate each month.
  • Year 2: As the first certificates mature each month, renew them into 36-month certificates AND continue funding one new 12-month certificate each month.
  • Year 3: As the second year’s 12-month certificates mature each month, move them into 36-month certificates AND continue funding one new 12-month certificate each month.
  • Year 4: As the third year’s 12-month certificates mature, move them into 36-month certificates. (Of course, if you want to expand your savings, you can continue to fund additional new certificates.)

Year 4 is also a time to step-back and celebrate as your first set of 36-month certificates begin to mature! You now have a robust savings system where you can access one certificate each month if needed. If you take no action, each will roll-over to a new 36-month term at the new rate.

Depending on your financial goals, you can ladder any way you want. For help starting your certificate laddering plan, contact your local branch or call us at 425.283.5151 or 800.273.1550.

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