Planning for term deposit maturities can protect yourself from lower returns.
One of the risks of saving with term deposits is interest rate. If all your term deposits mature at the same time, and rates are low at that time, it may reduce your overall income or growth of your savings.
One way to avoid this risk is to ladder your term maturities.
What is laddering?
You can reduce interest rate risk by allocating a portion of your savings to terms with different maturities, so a portion matures each year rather than all at once. For example, if you have $100,000 to invest in term deposits, split your terms into five $20,000 terms with one coming up for renewal each year for the next five years.
Now only 20% of your term deposits will mature each year. As the terms come up for maturity, you can cash the term in or reinvest it for five years at the then prevailing rate. Reinvesting at the 5-year rate will maximize your rate of return but you will still have a portion maturing each year. The laddering strategy locks in the portfolio for higher long-term rates, yet also provides liquidity.
Want to talk to a Gulf & Fraser expert about laddering or do you have other questions about your finances? We’d be happy to meet with you!