Generally, you’ll earn more from time deposits the longer you’ll keep your money in them. However, one downside is that you can’t withdraw your money for a certain period.
If you aren’t ready to lock away your money for a length of time, laddering is a strategy that offers a little more flexibility. Find out how it works and how you can benefit from it through this guide.
How does time deposit laddering work?
Time deposit laddering involves opening multiple time deposits with different maturity dates. You’re basically spreading out your money across different time deposits instead of investing all of it in one product.
Here’s an example:
You have P30,000 to invest in December. You’ll divide it into 3 time deposits with P10,000 each. The first placement matures in 1 month (January), the second matures in 2 months (February), and the third matures in 3 months (March).
Once the first placement matures, you can either take the money out or start another 3-month time deposit that ends in April. If you’ll keep the ladder going, one of your time deposits will mature every month.
Why ladder your time deposits
Once you’ve built a time deposit ladder, you can keep enjoying fixed earnings while having the option to take your money out every now and then. Here are other reasons to consider time deposit laddering:
1. You can customize your strategy
Flexibility is a key advantage of laddering. You can set the amount and staggered maturity dates of your time deposits according to your plans and larger financial goals.
2. It helps lessen risks
When spreading out your time deposits, you can choose different banks or financial institutions for each placement. This lessens the risk of loss in case one of them runs into trouble.
3. You can maximize returns
When you place a new time deposit, you can take advantage of any higher interest offered. You may add more money to the principal of your new time deposit if the interest is higher compared to your previous time deposit placement.
You can also shop around different banks for higher interest rates once a placement matures so you won’t miss out on better opportunities, if there are any.
How to ladder your time deposits
Laddering is a simple method that requires you to open multiple time deposits. Follow these steps to apply this strategy:
1. Set an investment amount
Figure out how much money you want to invest and how you’ll divide it. You can split the money into equal parts or allocate a bigger amount to the time deposit with the longest term for higher earnings.
2. Choose your preferred term
How often do you want to revisit your time deposits? You may choose to do so every month, quarter, or year. This is your schedule for deciding whether to “renew” your time deposit or use your money for something else.
3. Start your staggered time deposits
Lastly, open time deposits based on your preferred amount and terms. You can place a time deposit through most banks authorized by the Bangko Sentral ng Pilipinas (BSP).
Things to remember
- Pre-termination is an option if you want to close your time deposit before maturity, but you’ll need to pay a penalty.
- Laddering is worth considering if you want short-term access to some of your money while continuously growing a large portion of it.
- Your earnings from time deposits are calculated based on the investment amount and the length of the term. Interest rates are generally higher if you opt for longer terms.
