Building a Ladder to Savings Success

If you’re looking to build a savings nest egg, but you’re uncertain about the volatility of the stock market and less than thrilled with the low rate of return that most “brick and mortar” banks offer, there may be a better savings strategy out there. Many experts recommend investing your nest egg savings into certificates of deposit (CDs), and using a technique known as “laddering” to earn significantly more on your investment.
   
CDs are considered by many to be a safe, dependable way to earn a good return, since they contain a low level of risk, and are backed by the protection of the FDIC. Buying a CD essentially means that you are allowing a financial institution to “borrow” a lump sum of money for a certain period of time, in return for an agreed-upon interest rate. Although the interest rate is typically fixed, some banking institutions do offer CDs that can fluctuate, based upon a specific stock market index. You determine the length of time that your money is being “borrowed,” typically between three months to five years. As a general rule, the longer that the money is locked up, the higher the rate of interest.

      One important thing to keep in mind about most CDs: to achieve the savings earned by the guaranteed interest rate, your money is “locked up” for the length of the term. Withdrawing even a portion of the money before the maturity date carries with it an often significant penalty. This is where “laddering” a CD can come in handy, because it allows an investor to obtain greater flexibility—and also, the ability to make much more from the investment.

      “Laddering basically means taking the amount of money you’re looking to invest and buying three or four separate CDs at one time, with different maturity dates,” explains Kim Ellis, director of product development for MetLife Bank. “For example, you may choose to buy a six-month CD, one-year CD, and two-year CD. Whenever a CD matures, you can then choose to roll this amount over into a longer-term CD with a higher rate, or use it for an immediate need.”

      This strategy can also result in significantly greater savings—often thousands of dollars. By locking all your money up into one CD, you are guaranteed a certain rate, but can’t take advantage of the changing market. In contrast, having several smaller CDs with different maturity dates gives you the opportunity to do some research, and take advantage of great deals from reputable banks offering attractive interest rates. When doing so, however, make certain the rate being offered is consistently high, and not simply a promotional rate.

      To make the most out of this strategy, it’s also important to consider all the available options, including alternatives to traditional banking institutions. Thanks to the internet, investors in more remote locations can take advantage of great rates offered anywhere in the country. As a general rule, direct banks typically offer more competitive rates than traditional brick and mortar banks. For those who feel uncomfortable conducting business on the Web, some direct banking institutions have developed a network of relationships with financial services representatives, which can offer the trust and comfort of dealing with a local financial adviser.

      “People can secure higher interest rates by depositing the money they want to save in a direct, or online bank,” said Ellis. “Depending on your balance, just a one percent difference in the interest rate can mean hundreds, or even thousands, more dollars in your pocket in just a few short years.”

      To help people learn more about savings and investing and beginning a savings plan, MetLife offers a free brochure: “Building Financial Freedom,” which has information on how consumers can seize control of their finances and start planning for the future, by understanding the basics of investing and the appropriate steps to prepare financially for the future. It’s available by visiting www.metlifebank.com. (MS)