CD Investment Basics

How to Use CD Investments

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Certificates of Deposit (CDs) are investments that help you grow your money safely, and using them can be as simple or as complicated as you want. If your needs are basic, it’s easy to put money into a CD and start earning more than you were earning in your savings account. But you can also add more complex strategies if you have particular goals in mind.

Basics of CDs

A CD is a type of account available at your bank or credit union.

Similar to a basic savings account, you earn interest on the money you deposit. CDs typically pay you more than other bank accounts, but there’s a catch: you have to leave your money in the account for a specific length of time. For example, a six-month CD is meant to be left alone for six months.

CDs are available in a variety of terms ranging from six months to five years. Longer-term CDs usually pay more than shorter term CDs (because your commitment is greater), but there are exceptions. Some CDs also adjust the interest rate you earn over time. If you pull your funds out of a CD before it matures (before the specified amount of time passes), you’ll have to pay an early withdrawal penalty.

For a more complete discussion, see How CDs Help you Earn More.

What type of Investment is a CD?

CDs are safe investments. They are best for situations when you do not want to risk losing your money. For example, you might have plans to buy a new home in two or three years, and you’re building up a down payment.

You won’t need to spend the money in the immediate future, so locking it up for a higher interest rate makes sense.

For longer term goals, like a retirement that is more than 20 years away, CDs might or might not be the right investment. It’s worth spending time with a local financial planner to discuss your long-term goals and all of the options available to you.

Of course, your money is only safe if it is FDIC insured, or covered under NCUSIF insurance if you use a credit union.

How to Invest in CDs

To buy a CD, just let your bank know which CD you want (the six-month or the 18-month CD, for example) and how much money to put into it. Some banks have minimums ($1,000 or so) while others let you start as small as you want. CDs can often be set up online, especially at online-only banks.

When your CD matures, you’ll receive a notice explaining your options. In most cases, you can

  • Let the CD renew (into another CD with the same length of time)
  • Buy a different CD (switching from a six-month to a one-year CD, for example)
  • Move the funds to a checking or savings account
  • Withdraw the funds

It’s best to review your reasons for using a CD and make a decision about what happens with the money – don’t just let it automatically renew every time. See What to do When your CD Matures.

If you’re concerned about locking your money up, you might want to start with liquid CDs, which allow you to withdraw some or all of your money before maturity without penalty.

They often pay less than traditional CDs, but they can help you get a feel for how CDs work.

Investment Strategies

Most people just choose a CD based on the length of time that they prefer, looking at interest rates and the amount of time they’re able to lock their money up. There’s nothing wrong with that approach – you’ll boost your earnings above what you’d get in a savings account, and a simple plan is often the one that’s easiest to stick to.

However, if you want to optimize your CD investing, there are several ways to manage your CDs. Those ideas are described briefly below, and in more detail on our page about CD investment strategies.

Laddering is a strategy of buying multiple CDs with different maturity dates – from short-term to long-term maturities. This helps you keep money available and avoid investing all of your money when interest rates are at their worst. Read more about setting up a CD ladder.

A bullet strategy allows you to have all of your money available when your “goal” arrives. You’ll earn more than you would have earned in savings, and you’ll be able to write a large check when the need arises.

A barbell approach sticks to short and long-term CDs (while skipping medium-term CDs). If medium-term interest rates are unattractive, you can just steer clear of them.

Investment Managers

If you don’t want to handle your CD investments by yourself, you can always hire somebody to do it for you. Of course, it’s important to know who you’re dealing with and avoid scams and Ponzi schemes. If you hire somebody, they may use brokered CDs, which are a little different from plain vanilla CDs in your bank account.

Be sure to ask the following questions of any investment manager:

  • Are my funds insured by the U.S. government?
  • When will I get my money back?
  • Is early withdrawal possible, and what is the penalty?
  • How much will I earn, and is this rate guaranteed?
  • Does the interest rate ever change?

Money Market Accounts

CDs aren’t the only safe investments at your bank. Money market accounts also pay more than savings accounts, but they offer more flexibility than CDs: you’ll often get a checkbook or debit card that you can use to spend from the account. However, withdrawals (or spending) might be limited to three times per month. Learn more about money market accounts.

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