Laddering Certificates of Deposits
by Chris Morin, EVP / Bay Area Regional Director – Commercial Banking, Scott Valley Bank
In the last few years, more businesses and consumers have been concentrating on paying down debt and improving their cash levels. The increased level of liquidity is used to support business operations or household expenses and then any remaining idle cash can be invested to earn additional interest income.
Do you or your company have surplus cash and are you looking for a simple way to diversify your investments and still keep a ‘safety valve’ level of funds always close at hand? Laddering a portfolio of Certificates of Deposit (“CDs”) is a simple strategy that always keeps a reasonable amount of funds within short-term reach while achieving an improved return on most of the funds.
So, what is laddering?
It is a portfolio of multiple bank CDs with different maturity dates which will provide a guaranteed rate of return with an improved liquidity compared to one lump-sum CD at a longer term.
With the current low interest-rate environment, many people will keep their ladders more short-term, such as purchasing one, two and three-year CDs (and the allocation of the dollars depends on what their cash needs will be in the near term). With a laddered CD portfolio, a portion of your aggregate funds are always within short-term reach. When each CD matures, the strategy is to roll the maturing balance of the account or any new money into a three-year term (or the longest term in your ladder). Since your initial investment, the two-year is now due in one year and the three-year will mature in two years. You now have funds within a one year window, so you will always have funds within easy reach. When yields improve, most will employ this strategy with up to five-year terms. Before you know it, you have your allocation of cash invested in a reasonable long term, with a portion of it always within 12 months of maturity.
Structure your ladder however it works best for your projected liquidity needs to keep cash close at hand yet able to improve your yield when rates begin to rise. There are many other cash investment solutions that could be considered and you should always reach out to a trusted advisor – Banker, CPA, and Investment Manager – should you need assistance.