Certificates of Deposit for Your Cash Reserves

Choosing the length of savings certificates is an important decision. The issues of liquidity and the future direction of interest rates can make this decision challenging. Longer maturity certificates usually offer the highest returns, but they also lock up your funds for a longer period. Shorter maturities provide greater flexibility to take advantage of rising rates, but typically offer lower returns. Ideally, you want the highest current return combined with the ability to invest at higher rates if interest rates increase.

Creating a "ladder" of maturities is a way to build a "portfolio" of certificates that will position you to earn good rates and invest at higher rates if interest rates rise. Simply put, with this strategy, you divide your funds into parts and buy equal amounts of certificates with different maturities. Here is an example:

Let’s assume you have $25,000 and want to buy certificates with maturities up to five years. The rates on certificates are:

By making initial purchases of $5,000 in each of the different maturities, your average rate would be about 1.45%. Each year, as a certificate matures, you would use the proceeds to buy a new 5-year certificate. This approach ensures that over time, more and more of your funds earn the highest rate, while still maintaining annual liquidity. If rates rise, you have the flexibility to buy higher-yielding certificates. If rates fall, you continue earning high rates on your existing investments.

No one can accurately predict the future of interest rates. Using this "Ladder of Maturities" strategy can help you benefit regardless of interest rate movements.