Certificates of deposit (CDs) are financial products banks and credit unions offer. Based on a Gainbridge® study, 71% of persons purchase CDs because they’re relatively low risk, 65% do so because of the fixed interest rate and predictable returns, and 57% do so because of the higher interest rates than traditional savings accounts.
Sound like a promising investment solution for you? In this article, we’ll cover key strategies on how to invest in CDs and share important considerations to help you decide if these accounts are right for you.
CDs are a type of savings account that often offers a fixed interest rate. Unlike traditional savings accounts, CDs lock your initial deposit (or principal) into place for a set term — typically three months–5 years. During that time, you may not withdraw any funds without incurring withdrawal penalties.
On average, CDs earn between 0.23% and 1.82% interest per year, while standard savings accounts hover around 0.41%. And as an added advantage, the Federal Deposit Insurance Corporation (FDIC) insures CDs up to $250,000.
In most cases, savers deposit a lump sum in a CD at a fixed rate for a predetermined term. When the CD matures — meaning it reaches the end of its term — they either take the funds out or put them into a new CD.
But that’s not the case with everyone. Depending on your financial goals, you may find that one of the following strategies is more suitable.
A CD ladder involves opening multiple CDs with different terms and maturity dates. This balances access to funds (liquidity) with the potential for higher ernings (yield).
Long-term CDs tend to have higher interest rates, but regardless of term length, early withdrawals usually come with penalties. That’s why CD ladders can be advantageous — the longer contracts offer better yields, while the shorter ones allow for more frequent, periodic access to your funds as they mature.
Say you have $50,000 that you want to invest in CDs. If you go the ladder route, your investments may look like this:
As the accounts mature, you can choose to cash out or reinvest. To maintain the “ladder” effect, you may roll each matured CD over into a new five-year term.
While a CD ladder staggers your funds across multiple maturity dates, a barbell typically just involves one long and one short-term investment. In practice, this may look like putting half of your $50,000 lump sum into a one-year CD and the other half in a five-year CD.
Once the one-year CD matures, you can reinvest it into another short-term CD to access higher annual percentage yields (APYs). This strategy is particularly beneficial if CD rates are low but analysts expect them to rise soon.
A CD bullet involves investing in multiple CDs over time, each with the same maturity date. Assuming the same $50,000 lump sum, a bullet strategy may look like this:
In year six, all five CDs mature at once, returning the entire $50,000 lump sum plus accumulated interest.
CD bullets can help you save for time-specific goals — such as paying tuition fees or home deposits — by ensuring the full balance matures when you need it.
Below are three general upsides and downsides to CDs.
Investors often cite predictability, a low barrier to entry, and risk mitigation as the main benefits of CDs:
On the other hand, investors report less access to funds, reduced growth potential, and limited inflation protection as the downsides of CDs:
Here are a few alternatives to CDs so you can make a well-informed decision before investing:
Before you choose one CD over another, ask yourself the following questions.
Traditional CDs are the most common, offering a fixed interest rate, a set term, and a penalty if you withdraw funds before maturity. But traditional CDs don’t fit the needs of all savers — others prefer bump-up, jumbo, no-penalty, or variable options:
Over the past 100 years, the U.S. has experienced an average inflation rate of 3.3%. With an average APY of between 0.23% and 1.82%, CD funds will lose purchasing power over time. And the longer the term, the more inflation will affect this investment.
Like most investments, CD terms vary depending on your provider, so review the conditions carefully before choosing one. Here are a few things to consider:
These features may all interact with each other, too. For example, no-penalty CDs eliminate fees entirely but usually offer lower interest rates than traditional CDs.
Try to anticipate any reasons you may need immediate access to your money, and tailor your CDs accordingly. This could mean using a specific CD investment strategy or choosing an account without early withdrawal penalties.
Pro tip: Build an emergency fund to avoid these fees — ideally, one equivalent to 3–6 months’ worth of expenses. Keep this money somewhere accessible, like a high-yield savings account.
CDs are similar to a traditional savings account, but they offer slightly higher earnings. You’ll look for a bank that offers the interest rates and terms that suit your needs, then apply. Once the bank accepts, you’ll choose how you want to receive interest payments, then deposit a lump sum. These funds sit in the bank until the account matures, at which time you’ll get your principal and earnings back.
Yes, CDs are often considered safe investments. The FDIC insures them for up to $250,000, so even if your financial institution goes bankrupt, your funds are safe. And many CDs have minimal market exposure, so they grow at a predictable rate.
This communication is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.
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