Where do certificates fit into your overall portfolio?It all depends on the time frame, risk tolerance and goals you have for your savings.
A certificate is issued by a financial institution to a person depositing money for a specified length of time. It comes with a fixed maturity date and a specified fixed-interest rate. Access to funds is restricted until the maturity date of the investment.
Certificates tend to be for investors who aren’t tied to keeping a portion of their portfolio in cash, and want a safe place to invest funds for a guaranteed return. Access to funds is restricted until the maturity date of the investment.
Due to length-of-term and early withdrawal penalties, funds deposited into certificates typically shouldn’t be accessed until the maturity date. However, if you want more regular access to your money than the term offered by your certificate, “laddering” can help keep funds more readily available, while still building your savings.
A laddering strategy involves opening multiple certificates at one time, but with different maturity dates, giving you access to some of your money in a relatively short period.
Certificate Laddering, Explained
This regular access can be gained by staggering certificate purchases by terms (five-, three-, and one-year) into a regular maturing cycle of available funds. You create consistent access to maturing cash. Some investors also go the route of having high-yield certificates mature every year. This strategy allows a high level of flexibility, peace of mind, helps reduce interest rate risk – in case rates rise, all your funds aren’t locked into lower earning rates – and you continue earning an attractive return.
Let’s say you have $10,000 to invest. Put $2,000 each into certificates that mature as follows: $2,000 into a one-year certificate; $2,000 into a two-year certificate; $2,000 into a three-year certificate; $2,000 into a four-year certificate; and $2,000 into a five-year certificate. In one year, your first certificate matures and you have access to $2,000 plus the interest you earned.
How It Works
If you don’t have an immediate need for the funds, you can reinvest in a five-year term to earn higher interest. In another year, the two-year certificate matures and you also reinvest it in a five-year term. By the end of the fourth year, all of your money is earning at the five-year rate.
Since one of your certificates matures each year, you can tap into the cash if you need it. Laddering gives you both bigger savings and the advantage of maintaining access to your money. Spreading the maturities from one to five years is just one strategy. If you prefer to tie up your money for shorter time spans, you could invest in three, six, 12, 18, and 24-month certificates, or up to 60 months or more.
Visit Truliant.org/Certificates to learn more about investing in Truliant certificates. You can also schedule an appointment at any of our convenient locations at Truliant.org/Locations, or speak with a specialist at 800.822.0382 to open by phone.
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