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Make your investments climb using the laddering system

RateCity investigates an interesting technique for investing in term deposits.

August 11, 2010

Laddering is not only something that happens to women's stockings, it is also used to define a type of investment strategy that investors use with term deposits.

Basically, laddering is a way of assembling your cash investments so that your funds are more regularly accessible while still being able to take advantage of high-interest long-term deposit accounts.

Rather than investing the entire chunk of your savings and tying it up for a long period of time, laddering suggests you divide the total amount into three equal parts and invest each for a different term. The idea behind this approach is that each one of your funds will mature, giving you a return at regular periods.

Climbing the ladder
Let's say you have $21,000 to invest. Break this down into three equal portion of $7000 and deposit each into a different length term deposit that will earn you a high rate of interest.

For example, using RateCity's list of top-rate term deposits (current as at August 9, 2010), if you deposit $7000 into a one-year term at 6.60 percent with ING Direct, then the second portion into a two-year deposit at 6.80 percent also with ING Direct and then the last portion into a three-year term deposit at 6.80 with Greater Building Society.

If interest is paid at maturity, in 12 months' time the first account will have earned you $462 in interest. Then the next year, your two-year account will earn $924 in interest. The following year, the three-year term deposit will return you with $1428.

At the end of each year you can reinvest your $7000 (or add your return to your investment) into another three-year term, that way you will end up with a nice chunk of interest every year.

Benefits of the laddering system
This investment option not only offers easier access to your money but it can help deliver a regular income and steady returns. Additional benefits laddering can offer include:

It minimises the impact of interest rate fluctuations, because you reinvest the amounts regularly.
While keeping up-to-date with the market, it allows you to compare term deposit options regularly.
You avoid penalties for early termination because not all of your money will be locked away for a long time.
Laddering presents less risk and a higher chance of better returns because you are not holding a single investment for a long period of time.

Remember to compare term deposits online to find an account that offers a high interest rate and lower fees.

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