Squirreling away money into a savings or checking account at a credit union is the first step a person can take on the path toward financial security. But it’s just a step—one that will provide nominal interest in return.

That small percentage is better than nothing, but did you know there are more advanced, low-risk banking strategies that can generate larger returns, such as share certificate laddering?  

Today we’ll break it down, so you can get the most bang for your buck. 

What Are Share Certificates? 

Share certificates, sometimes referred to as term share certificates, are a savings account program that resembles banks’ certificates of deposits (CDs); although, their specific terms and features can vary. 

These accounts provide a higher interest rate than a normal savings account in exchange for a minimum deposit and a fixed term length, typically ranging from six months to five years. With certificates, the longer the term commitment, the higher the dividend yield will be; however, if you withdraw money before the certificate reaches maturity, you’ll likely incur a set penalty and will surrender the dividends accrued during that period. 

Like a savings account, share certificates are insured by the National Credit Union Administration (NCUA) and protected against loss for depositors for up to $250,000 per individual account holder. 

The Liquidity Issue with Long-Term Share Certificates 

The longer the term, the higher the interest rate. Knowing that, if your goal was to maximize returns, the best decision would be to put all of your funds in the longest-term share certificate available, right? 

While it may provide the most interest possible, investing everything in long-term certificates would effectively lock up all your available funds until those certificates reached maturity. That  would leave you illiquid, which could have negative consequences in the event of an emergency expense. 

For example, if you needed quick cash for medical bills or car repairs and your entire investment was tied up in long-term certificates, you would then be forced to make an early withdrawal and incur penalties. Also, you can’t simply redeem part of the certificate; you need to redeem all of it, then pay the interest penalty.

Knowing this, if you want to maximize your return on investment (ROI) while retaining a measure of liquidity in your financial accounts, the less risky option would be to deploy a technique known as laddering.

What Is a Share Certificate Ladder and How Does it Work? 

With a certificate ladder strategy, an investor purchases several share certificates with varying maturity dates—six months, one year, two years, five years, etc.—to take advantage of the long-term higher rates, while retaining a portion of those funds in short-term intervals. 

Just like a ladder has rungs at different heights, a share certificate ladder staggers maturity dates, with each successive date representing a higher rung on the investment ladder. Once those funds mature, the account owner can either withdraw or invest them into a new certificate higher up the ladder.

How to Create a Share Certificate Ladder

Let’s build a theoretical five-year share certificate ladder, with a $10,000 investment. Instead of putting $10,000 into a single five-year certificate, this ladder would have five rungs, with $2,000 invested into each certificate: 

• $2,000 into a one-year CD at 2.5% APY
• $2,000 into a two-year CD at 3% APY
• $2,000 into a three-year CD at 3.25% APY
• $2,000 into a four-year CD at 3.75% APY
• $2,000 into a five-year CD at 4.25% APY

After a year had passed, you would have $2,050 ($2000 original investment and $50 interest) that you could either cash out or roll it over into a new five-year certificate. Then once the two-year certificate reached maturity, you would repeat the process. As time passed, you could continue further up the ladder, with increasingly more money invested in each long-term share certificate thanks to accruing interest. 

Put simply, a certificate ladder lets your money work for you—the higher you go, the more interest it will generate. 

What are the Pros and Cons of Laddering Share Certificates? 

Like any investment strategy, there are potential advantages and disadvantages to the laddering technique. Whether it’s right for you will depend on your financial situation, risk tolerance, investment time horizon, and liquidity needs. That said, pros and cons may include: 

Pros 

• Better interest rates – Creates opportunity to earn higher interest rates than traditional savings accounts.
• Increased accessibility – Provides greater liquidity, enabling you to withdraw funds in annual intervals without incurring a penalty.
• Reduced risk of missing out on high-interest rates – If interest rates increase, you can still enjoy the higher rate the next time you roll over the funds.
• Financial flexibility – You’re free to decide how you split up investments and whether you cash out or roll the money over.

Cons

• Opportunity cost – Certificates are a lower-risk investment than, say, stocks or property. As a result, they can’t provide nearly as high a return.  
• Inflation – Even as rates increase, they have been outpaced by inflation, meaning the value of returns will likely decrease over time.
• Multiple maturity dates – You need to track when each share certificate will reach maturity. Once that occurs, you typically have a limited window to withdraw the funds without incurring a penalty. If you miss that window, your funds will most likely be automatically renewed for the same original term. 

Other Share Certificate Saving Strategies

Term share certificate laddering is proven to be an effective saving strategy for many, but if you’re looking for some other saving techniques to try out here are a couple to consider.

The share certificate barbell is a savings strategy where you invest your money between share certificates of two different maturity periods: one longer-term and one shorter-term. By halving your money between these two terms, you gain the benefit of having earlier access to half of your funds, but will realize an overall higher interest rate due to the longer-term share certificate bringing your average rate up.

For example, if you have $20,000 to invest in a barbell strategy, you would split $10,000 between three-month and five-year term share certificates. The money invested in the three-month certificates comes with an interest rate of 0.5%, while the money invested in the five-year certificates comes with 2.5%. This means the average is 1.5%, and while lower than the interest rate of the five-year term, what you gain is access and liquidation to have of your funds after the three-month period. You can adjust these numbers to best fit your needs, though generally the barbell strategy involves a very short term certificate averaged against a long one, and the funds gained from the maturation of the shorter-term certificate are reinvested into another one of similar term length.

Another way to save is through the term share certificate bullet strategy. Similar to the certificate laddering strategy, the bullet involves putting your money into share certificates of different term lengths, but with the goal that they will all mature on the same date just in time for a big purchase or investment, like a house.

To use this strategy, you invest a set amount of money over the course of several years. Let’s say you invest $10,000 into a five-year share certificate. The next year, you invest another $10,000 into another certificate, but this time the term is four years. The next year, you invest the same amount into a three-year certificate, and you repeat the process until all of these certificates mature at the same time in the fifth year. This allows you to have access to your money by not saving it all at once, but staggered over the course of several years, and you’ll guarantee you have the money to fund that big purchase.

The Bottom Line for Your Bottom Line 

Investing in share certificates with your local credit union is a fairly low-risk strategy that will provide greater returns over time than simply putting your money into a savings account. And by deploying a technique like a ladder, you can enjoy both longer-term interest rates while retaining a measure of liquidity. 

Want to start your own share certificate ladder or learn about other CD strategies, like the barbell or bullet?

We can help. Whether you simply want to invest in a share certificate or need additional guidance on savings strategies, we can connect you with a credit union for your financial situation and long-term goals.  

Ready to start climbing your financial ladder? Get started today.