As a small snowball rolls down a hill, it gains speed and eventually becomes a giant snow boulder. This is commonly known as the “snowball effect.” You’ve probably heard of this as it relates to smaller things snowballing into bigger situations – and it’s not always a good thing. But how could the snowball effect impact your money in a positive way?
It starts with CDs – otherwise known as certificates of deposit, or just simply certificates. You can find them at your bank or credit union. And with the right strategy, you can roll a small amount of savings into something more!
What are certificates and how do they work?
There are two key differences between a certificate and your typical checking and savings accounts. A certificate generally has a higher interest rate, meaning you’ll earn more from your money over time. A certificate also requires you agree to a set period of time where your money must remain in the account. This is known as the term length. When the term ends, you can withdraw the funds.
Whatever your goals may be – a new car or a down payment on a house – there is a certificate out there to help you achieve them. A longer term length means that your money will be untouchable for a longer period of time and can generate a higher return. For example, you could use this option if you know you’d like to purchase a home in the next 10 years. A shorter term length – between three to five years – is a good option for meeting your short-term goals, such as a down payment on a car or a nice family vacation.
Here’s where your snowball effect comes into play. Certificate laddering, a well-known strategy using multiple certificates, can provide you with a steady and stable source of savings over time.
For example, instead of putting $5,000 toward one certificate, you can put $1,000 in five certificates with staggering term lengths: one year, two year, three year terms, etc.
Once the youngest certificate matures, you then roll that sum into the highest “rung” of the ladder. This allows you to maximize your earnings while having periodic access to your money as needed.
Let momentum do the work!
Certificates work so well because your savings are locked into a set term length, which means interest will accrue and grow your savings. You can see for yourself with this online tool that shows the benefits of using certificates. Don’t hesitate to seek advice from a trusted financial institution to help you identify your goals and match a certificate to help meet them. The sooner your savings snowball starts rolling, the sooner you can reap the benefits!