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The importance of term deposit laddering

December 4, 2019   3 minute read

Get the benefits of a long-term rate without giving up easy access to your funds

Is your term deposit strategy working for you? It can be hard to decide between getting the best rates from a long-term investment and keeping easy access to your savings for life’s ups and downs. Laddering your term deposits is a great way to get the best of both worlds.

How does it work?

The idea is to create an investment ladder by splitting your savings into separate investment bundles with different terms and maturity dates. You decide on the length of the ladder (eg. 5 years, 3 years or even shorter).

Here’s an example* of what a 5-year ladder with $100,000 to invest could look like, if you invested today:

$20,000 @ 1.20% matures on today’s date in one year

$20,000 @ 1.50% matures on today’s date in two years

$20,000 @ 1.75% matures on today’s date in three years

$20,000 @ 2.00% matures on today’s date in four years

$20,000 @ 2.10% matures on today’s date in five years

*These rates are hypothetical and are for illustrative purposes only. Please talk to an expert to discuss your specific situation.

In one year, you can either cash in the one-year investment or add a new rung to the ladder by reinvesting the funds in a 5-year term. You’ll have this choice each year as a different term deposit matures.

What are the advantages?

You get a steadier return and can regularly access part of your money without incurring a penalty.

The staggered maturity dates also mean you lower your risk of having to renew all of your savings at a lower rate if rates take a nose dive. In a time of falling rates, the bulk of your money remains locked in at the higher rate, giving you a better return.

What are the disadvantages?

If rates rise, your locked-in investments may be stuck with a lower rate for some time. There is also the risk of not keeping up with inflation if you don’t have enough diversification in your portfolio.

Overall, laddering is a simple technique to consider to get steady returns. Talk to an expert to see if this strategy would be a useful part of your savings plan.