If you’re in the entertainment industry, you don’t need us to tell you how fast things can change. The economy seems to be in its usual state of fluctuation, the job market is iffy, and investors seem unsure where it’s all going to go.
Fortunately, there’s a simple and extremely smart investment strategy, called Laddering, that can help shield you from fluctuations in interest rates while still providing you with frequent access to your funds. Laddering is one of the most effective financial strategies around.
What does it mean to “ladder” Certificates?
You start your ladder by buying two or more Certificates at one time – each with a different maturity date. For example, one-year, two-year, three-year, four-year or five-year. Laddering means that every time one of your Certificates matures, you simply roll it over into a new Certificate with a longer term and higher interest rate.
For example, let’s say you have $3,000 sitting in a savings account or money market account, but you’d like to earn more interest while maintaining liquidity and easy access to your funds. You purchase three Certificates, each for $1,000. The maturity dates of your Certificates are: one, two, and three years.
Think of your Certificates like the rungs on a ladder. After a year, the one-year Certificate occupying the first rung matures and each of the other Certificates moves down a year. In other words, the two-year Certificate now matures in one year; the three-year is two years from maturity, etc. The money from the one-year Certificate that has just matured is rolled over into the now vacant three-year rung. Every year you’re replacing the rung that’s farthest out – in this case the three-year rung.
Step by step, laddering makes the most of your money.
The key to Laddering is to use the same term for each Certificate once you start rolling them over at maturity. By always replacing the longest maturity – the top rung on the ladder – you’re always reaping the benefit of getting the highest rates. Also, by having a ladder, you’re only reinvesting a portion of your investment when yields are low. At the end of three years you’ll be sitting pretty; you’ll have three Certificates with one maturing every year, so you’ll never have all of your money tied up long-term or at lower than market interest rates. It’s a simple and effective strategy to keep your money climbing at the same pace as your goals.
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