How to build the best certificate ladder for you

This savings strategy combines the security of term-share certificates with the flexibility of staggered maturity dates.

Think of it as doing your part to not put all your eggs in one basket: By spreading your certificates across different terms (and rates), you can better protect yourself from the uncertainty of how rates will change in the future.

Learn how a certificate ladder works, what to consider when building one, the pros and cons of this strategy—and whether it’s right for you.

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What’s a certificate ladder?

Term-share certificates (the credit union version of bank CDs) have been a longtime, popular investment tool for people who want a safe and stable place for some of their funds.

Certificates offer a fixed earnings rate over a specified period (term) and can provide a reliable source of income.

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But a certificate on its own may lack some flexibility since you must commit your funds for the entire term to avoid paying a penalty for early withdrawal.

That’s where certificate ladders come in.

Certificate ladders operate on a simple principle: Instead of investing in a single certificate with a fixed term, you distribute your funds across multiple certificates with different, staggered maturity dates.

Certificate ladder example

What does that look like? Here’s an example:

Instead of investing $10,000 in a single five-year certificate, you could invest $2,000 in five different certificates, each with a maturity date one year apart. This strategy creates a “ladder” of certificates, with one maturing each year.

When each certificate matures, you’ll have the option to renew it to keep your ladder going or withdraw that money.

What are the advantages of certificate ladders?

Here are some benefits of certificate laddering:

Increased flexibility

The primary advantage of certificate ladders is their flexibility. By staggering the maturity dates, you have access to a portion of your funds at different times instead of tying up your savings for one long duration.

This feature is especially beneficial in an environment of rising rates because it allows you to reinvest a portion of your funds at higher rates.

And in a falling-rate environment, this strategy offers some protection. It ensures that some of your funds stay locked in at higher rates instead of all renewing at lower rates.

“Keep your eye on the long run and keep in mind that over time the returns will average out as the market ebbs and flows,” said Dupaco Community Credit Union’s Tami Brandenburg. “It’s important to stay the course.”

Liquidity

These ladders provide a level of liquidity that a certificate on its own lacks.

This way, you have multiple opportunities to access a portion of your invested funds without incurring penalties in case of an emergency or an unexpected financial need.

“Think about things you may need the money for and how long it can be tied up when you choose your certificate ladder terms,” Brandenburg said.

For example, if you think you’ll need to access some of this money more frequently, you could consider laddering with shorter terms. So instead of a certificate maturing every year, maybe one matures every six months.

This liquidity can offer some peace of mind and a safety net that can be especially attractive if you’re a more conservative investor.

Yield curve advantage

Another benefit of certificate laddering is the ability to take advantage of the yield curve. The yield curve is the relationship between the dividend rates and maturity dates of fixed-income securities.

Many times, longer-term certificates offer higher dividend rates than shorter-term certificates to compensate for the additional risk.

But by creating a ladder with varying maturity dates, you can enjoy the potential benefits of both short- and long-term rates and give your money in certificates a better chance at growth.

“Dupaco’s great tiered rates make it easy to get an above-market yield on any term you choose for the ladder,” Brandenburg said.

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Lower reinvestment risk

Certificate ladders can also help you manage 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, you can mitigate this risk by reinvesting a portion of your funds each year. If rates decline, only a fraction of your portfolio is affected, minimizing the overall impact.

What are the disadvantages of a certificate ladder?

Despite its many advantages, certificate ladders aren’t the right choice for all investors.

First, each certificate within the ladder has a fixed term. This means early withdrawal penalties may still apply if you access those funds before a certificate’s maturity date.

Also, the rates offered on certificate ladders may be lower than those on riskier investments, like stocks or bonds. If you have a higher risk tolerance or want significant growth, you may prefer other investment options.

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