The secret to laddering

If you are looking for secure, low-risk investment options, term deposits are a popular choice. They offer peace of mind, predictable returns, and protection from market volatility.

But if you want more flexibility and better interest rates without giving up security, laddering your term deposits might be the solution.

Laddering is a strategy where you spread your money across several term deposits with different maturity dates. Instead of locking all your funds into one deposit for, say, three years, you divide the total into equal (or varied) amounts and invest each in different terms – for example, one year, two years, and three years.

As each term deposit matures, you can either use the funds to meet your needs or reinvest in a new long-term deposit at the top of the ladder. Over time, you’ll have deposits maturing regularly, giving you access to funds without breaking any terms early.

Let’s say you have $30,000 to invest:

• $10,000 in a one-year term deposit

• $10,000 in a two-year term deposit

• $10,000 in a three-year term deposit

When the one-year deposit matures, you reinvest it into a new three-year term. The following year, your two-year deposit matures, and you do the same. After the initial setup, you’ll have a deposit maturing every year, potentially locking in higher long-term rates while still maintaining annual access to funds.

The pros of laddering include:

• Improved flexibility thanks to regular maturity dates, meaning you won’t need to break a deposit and lose interest if you need cash.

• Long-term deposits usually offer higher rates, so laddering helps you access these rates without tying up all your funds.

• Protection from rate changes. You avoid locking all your money in at once when interest rates are low. As each deposit matures, you can take advantage of rising rates.

• A deposit maturing annually or semi-annually can create a reliable income stream.

Cons to consider:

• It’s slightly more complex to manage, as you’ll need to keep track of multiple accounts and maturity dates.

• It may not suit sudden large expenses, as only a portion of your funds is accessible at any one time without penalty.

Laddering term deposits is a practical way for you to balance income, security, and access. Talk to your bank or financial adviser to see how it might fit into your retirement plan.