A certificate is a savings account that generally earns a higher rate of interest than a regular savings account in exchange for your promise to keep the money in the account for a pre-determined period of time (term). The longer the term, the more interest you are likely to earn.
- Open a certificate for as little as $1,000, choose a term between three months and five years, and you are guaranteed to earn the corresponding interest rate until the term expires.
- At the end of the term, you can renew your certificate for the current interest rate offered at that time, choose a different term and interest rate, or move your money into another account.
- Avoid withdrawing money from your certificate before the term is over or you could be charged a substantial penalty.
Individual Retirement Accounts
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What is Certificate Laddering?
“Certificate laddering" is a strategy that can help you earn higher interest rates without tying up all of your money in one, long-term investment. Here is an example of how to set up a two-year certificate "ladder,"
- Divide the amount you have to invest into two or more certificates with different terms. For example, if you have $10,000 to invest, you might invest $2,500 each into four certificates with terms of six months, one year, 18 months, and two years.
- As each certificate “matures,” roll the funds into a new, two-year certificate.
- You can also structure your certificate ladder with longer terms of up to five years to earn a higher interest rate.
The Advantages of Certificate Laddering
Certificate Laddering provides two advantages:
- With one certificate maturing every 6 months, you will be able to withdraw money twice a year without a penalty.
- If you continue to purchase a 2-year certificate each time one comes due, you will earn a more consistent return on your savings. If rates climb, you can invest your money at the higher rate. If rates decline, only a portion of your money will earn at the lower rate.
Try our Certificate Laddering Calculator to see how this strategy can maximize your investment returns!