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.
Laddering describes 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, 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.