Banking 101 -
Is your money working for you?
In this article, we look at the benefits of laddering your savings, with a series of fixed-term deposit accounts.
Is your money working for you?
There is often an element of future-gazing when it comes to financial planning, as you need a strategy designed to meet your needs today, tomorrow, and over the longer term.
Whatever structures you have in place, there is always a need for cash and in an interest rate-rising environment, you will want to maximise the way your cash works for you. Now is a good time to ask yourself if your money is working for you?
Benefit from rising interest rates
We’re currently in a high interest rate environment, so now is a good time to take stock of your cash savings. There are several types of savings accounts available on the market – from instant access to longer fixed-term deposit accounts, which can optimise the interest you receive. Typically, fixed-term deposits offer some of the most attractive rates.
Introducing fixed-term deposits
Fixed-term deposits offer an agreed rate of interest over a set period of time. This approach means you know how much interest you will receive at the end of the fixed-term deposit, giving you clarity over this element of your savings strategy. It is important to note that most fixed-term deposits will not allow you to access your money before the term expires.
Fixed-term deposits are designed for saving larger sums, but you can also use these accounts to save smaller amounts over a series of fixed-term deposit accounts known as ‘laddering’.
What is laddering?
Laddering is a strategy for spreading money across a range of fixed-term deposits with different maturity dates and interest rates, such as monthly, quarterly, and annual terms.
For example, if you were to deposit £1m into a one-year fixed-term deposit today, you would know the interest rate you would receive at the end of the fixed term.
However, if you believe that interest rates might increase over the next 12 months, and that more attractive rates are yet to come, laddering could offer you more attractive rates and more flexibility, allowing regular access to your money on each maturity.
How laddering works
Say you have £500,000 to invest. You may choose to place the funds in five fixed-term deposits of £100,00 with differing maturities, ranging from 3-month to 2-year terms.
Once each fixed-term deposit matures, you have two options: take the money out or reinvest your funds with a similar or newly agreed fixed-term deposit and associated rate. Your choice will depend on your needs at the time.
Benefits of laddering fixed-term deposits:
- Diversification: Spreading investments across fixed-term deposits with different durations and rates minimises the impact of interest rate fluctuations
- Regular liquidity: Laddering provides periodic liquidity as fixed-term deposits mature at different intervals, allowing you access to funds
- Potential for higher returns: Reinvesting proceeds from shorter-term fixed-term deposits at potentially higher interest rates could result in higher overall returns compared to a single long-term fixed deposit. Remember though, the opposite is true in an environment where interest rates are falling
- Flexibility: Laddering allows you to adjust your investment strategy based on changing interest rate trends, financial goals, and liquidity needs
- Tax planning: Staggering fixed-term maturities can help you manage any tax liabilities more efficiently.
Creating a financial plan
If you would like to understand how this might work as part of your savings strategy, and which combination of deposits might work for you, please do get in touch.
Together we can help you create the life you want. Whatever your goals and ambitions for the future, our Private Banking teams focus our efforts on shaping your world now and in the years to come.
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