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What is a Certificate Ladder and What are the Advantages?

Share certificates have been a longtime, popular investment tool for individuals seeking a safe and stable place for their funds. They offer a fixed earnings rate over a specified period (term) and provide a reliable source of income. However, traditional certificates often lack flexibility since investors must commit their funds for the entire term. This is where certificate ladders come in.

Certificate ladders operate on a simple principle: instead of investing in a single certificate with a fixed term, savers distribute their funds across multiple certificate accounts with different, staggered, maturity dates. For example, instead of investing $10,000 in a single 5-year certificate, a member may choose to allocate $2,000 to five different certificates, each with a maturity date of one year apart. This strategy creates a “ladder” of certificates, with one maturing each year.

What are the advantages of Certificate ladders?

There are several significant advantages of certificate ladders:

• Increased flexibility. The primary advantage of certificate ladders is their flexibility. By staggering the maturity dates, savers have access to a portion of their funds each year instead of tying up their savings for one long duration. This feature is especially beneficial in an environment of rising rates, as it allows investors to reinvest a portion of their funds at higher rates. Conversely, in a falling-rate environment, it offers protection by ensuring that a portion of the funds stay locked in at higher rates instead of seeing it all renew at lower rates, which means less earning potential.
• Liquidity. These ladders provide a level of liquidity that traditional certificates lack. Investors can access a portion of their invested funds without incurring penalties in the event of an emergency or an unexpected financial need. This liquidity offers peace of mind and a safety net that can be especially attractive to conservative investors.
• Yield curve advantage. Another benefit of certificate ladders is the ability to take advantage of the yield curve. The yield curve is the relationship between the interest rates and the maturity dates of fixed-income securities. Typically, longer-term certificates offer higher dividend rates than shorter-term certificates to compensate for the additional risk. By creating a ladder with varying maturity dates, investors can enjoy the potential benefits of both short- and long-term rates.
• Lower reinvestment risk. Certificate ladders allow investors to manage the 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, investors can mitigate this risk by reinvesting a portion of their funds each year. If rates decline, only a fraction of the portfolio is affected, thus minimizing the overall impact.

Ready to get started?

Certificate ladders provide a compelling blend of flexibility, security, and liquidity. At Justice Federal, we are currently offering a 7-Month Certificate starting at 5.20% APY* and a 17-Month Certificate starting at 5.00% APY.* Start building your certificate ladder today with rates up to 3x the national average!** Visit jfcu.org/Certificates to learn more or open today.

*APY = Annual Percentage Yield. APY is subject to change without notice. Rate effective October 1, 2023. Minimum balance of $500 required. A penalty will be imposed for early withdrawal from certificate accounts. Fees or other conditions may reduce earnings.

**12-Month Certificate national average Courtesy of Bank Rate as of September 4, 2023.

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