The advantages of a term deposit are plentiful, and are a staple product offered by many international major banks (such as UBank or HSBC). The key features of a good term deposit are such that they appeal to those citizens who might not have the time, expertise, inclination or funds to experiment with more risky and high-return investments.
Here exists the opportunity to invest money at generally higher interest rates than are available with regular savings accounts. It is also very safe and secure (with guaranteed returns), as well as offering substantial choice to consumers – one can choose between as short a term as six months and as long as five years (often more).
But one of the disadvantages of a term deposit must be the prospect of not having access to the funds in question for a prolonged period of time. A general rule is: the longer the term, the higher the interest rate, thus investors who want to maximise the returns from their deposit will need to lock money away for years, without access to it.
Whatever the length of the term, such restriction may not be the best option for some people. This is where laddering comes in – the chance to enjoy all the benefits of a term deposit, yet have regular access to its rewards.
What is Laddering?
Laddering is where you divide up the sum of money you want to save into, for example, three smaller sums. You then invest each portion in its own different term deposit – for different periods of time and at different interest rates.
Let’s say you are investing $30,000. You place $10,000 in a one-year deposit with an interest rate of 5.8%, the second $10,000 in a two-year account at 6.2 % and the third $10,000 in a three-year term deposit at 6.8%. Of course, you can choose longer or shorter terms than these, and indeed spread your term deposits across more than one bank or building society.
The result is that after a year you will have $580 in interest from the one-year term deposit. Upon its expiry you can either re-invest the money (perhaps at three years to maintain the rate of annual returns) or use it. Then a year later, the two-year account will expire, yielding you much higher returns, higher still when the three-year deposit expires. If played correctly, investors can have an annual burst of ‘profit’ from their savings.
Laddering can become relatively complex when you get into the pattern of investing. It offers the opportunity to be imaginative and clever with your savings, with a high level of safety.
Some major advantages to utilising the laddering system are:
- Keeps you up to date with the financial climate, as opposed to locking your money away and throwing away they key, as is the practice with many long term deposits. You can therefore compare the term deposit options regularly and adapt your strategy accordingly.
- You minimise the chances of having fees and charges incurred, as you will have access to your savings more frequently.
- Lessens the impact of the wider financial climate and interest rate fluctuations. That is, because you are able to reinvest the amounts regularly, you can change provider or even invest in some completely different way should you wish.
As you can see, laddering can be a great investment strategy if done right. You just need to know the basics.
Have you tried laddering? How did it work for you?
The interest rate is so low right now, it doesn’t seem worth it. I’ll build a CD or bond ladder when the interest rate rise a bit. Right now, I’m fine holding my cash in an online saving account.
I think many of us are in the same boat.