Certificate of Deposit Strategy Guide

Ladders, Barbells, and Other CD Strategies

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Certificates of deposit (CDs) are special savings accounts that offer interest on a one-time deposit in exchange for locking in the funds for a set term. While CDs may be overlooked while interest rates are low, as rates trend up, more people may consider investing in them. 

To help you meet your cash flow needs over your savings time horizon, you can set up your CD allocations using strategies like ladders, barbells, and bullets. Understanding these certificate of deposit strategies can help you make the most of your money. 

Key Takeaways

  • CDs typically offer higher interest rates than regular savings accounts in exchange for locking in your funds. 
  • You may face penalty fees if you want to withdraw your money before the term is up, such as if you want to take advantage of rising interest rates.
  • CD strategies like ladders, barbells, and bullets can help you manage changes in interest rates while maintaining some liquidity.
  • Many banks offer more flexible CDs, such as those with variable interest rates or penalty-free access to your money.

CD Ladder Strategy: Spread Out Your Earnings and Liquidity

One of the most popular certificate of deposit strategies is the CD ladder. It allows you to spread out a traditional CD investment to maximize your interest income in the short term while maintaining regular access to your funds. 

Before selecting any CD, make sure to read the bank’s summary of its rate, term, penalty calculation, and any other features.

What Is a CD Ladder?

A CD ladder is a series of CDs, each of which has a different term length. For example, you could create a five-year CD ladder consisting of five CDs that mature after one, two, three, four, and five years. You could also build a shorter-term CD ladder, such as a one-year ladder of CDs whose terms are three, six, nine, and 12 months. 

Each time a CD matures, you can choose to cash it out or roll the proceeds into a new CD that matures after the last one in your series. You can also choose to cash out some of the funds and invest the rest in a new CD. 

How To Set Up a CD Ladder

To start a CD ladder, divide your money and use it to buy CDs with different terms. For example, if you have $6,000 to invest, you could put $2,000 in a one-year CD, $2,000 in a two-year CD, and $2,000 in a three-year CD. When the one-year CD matures, you could cash it out or roll it over into a new three-year CD to continue building your ladder.

Some financial institutions offer model CD ladders that make it easy to implement this strategy.

What’s the Point of a CD Ladder?

A CD ladder offers a balance of interest and liquidity. Different CDs in your ladder will mature at regular intervals, giving you penalty-free access to your money. However, longer-term CDs typically offer higher interest rates than shorter ones, so your ladder will help you maximize your CD earnings.

Overall, a CD ladder offers better returns than choosing shorter-term CDs, and more flexibility than locking your money into a longer-term CD.

Barbell CD Strategy: Combine Liquidity and Income

In a CD barbell, also called a barbell CD method, you’ll create a mix of short-term and long-term CDs. This strategy is similar to a ladder, but with fewer time periods because there are no medium-term options.

What Is a CD Barbell?

A CD barbell is a strategy in which you split your investments between short-term and long-term CDs. This method includes none of the intermediate terms you’d find in a CD ladder. A CD barbell gives you more liquidity since the short-term CDs will mature sooner while also giving you exposure to higher interest rates in longer-term investments.

This strategy’s name comes from the way that funds are clustered at either end of a time period, similar to the way that weights sit at either end of a barbell.

How To Set Up a CD Barbell

To start a CD barbell, simply put half the money you’d like to invest in a CD with a short term, such as six or nine months. Put the other half in a longer-term CD that won’t mature for five years or more. 

When the short-term CD matures, you’ll have access to some of your money, and you can withdraw it to pay for a short-term goal or unexpected expenses. You can also roll the funds over into a new short-term CD. In the meantime, your longer-term CD is earning a higher interest rate. 

Some depositors view a barbell as a first step in setting up a CD ladder. For example, you could start with a six-month CD and a five-year CD. As you save more money, you could add CDs with terms that fill in the gaps to build your ladder.

What’s the Point of a CD Barbell?

Using a barbell as your CD strategy can be a good option if you’re saving toward short- and long-term financial goals. A CD barbell may allow you to earn a higher interest rate than you could with a liquid savings account or a short-term CD while offering regular access to your funds so you can use them or look for better rates.

Bullet CD Strategy: Meet Specific Financial Goals

Many people use CDs to save funds toward a specific goal, such as a down payment on a house or to pay for a wedding. A bullet strategy can work well in this situation.

What Is a Bullet CD Strategy?

With a bullet CD strategy, you deposit money into several CDs over time—all of which will mature just before you plan to need the money. 

For example, suppose you’re saving up to buy a new-to-you car in two years. Here’s what your bullet strategy might look like:

  • Now: You might invest $2,000 into a two-year CD
  • Six months: You’ve set aside another $1,000, so you put it in an 18-month CD 
  • 12 months: You have another $1,000, which you put in a one-year CD
  • 18 months: You’ve saved another $1,500, so you put it in a six-month CD
  • 24 months: All four CDs mature, giving you $5,500 plus interest toward your new car

How To Set Up a Bullet CD Strategy

Using the bullet CD method is simple: 

  • Determine when you’ll need the money.
  • Buy a CD that matures just before that date.
  • Repeat as you save up more money, always choosing CDs that will mature by the date you’ll need the funds.

This CD strategy offers enough liquidity for you to meet your financial goal while earning more interest than you would with a savings account.

What’s the Point of a Bullet CD Strategy?

A CD bullet lets you gradually set money aside toward a financial goal. As you save up each chunk, you lock it away so you can guarantee it’ll be available when you need it. This CD strategy also allows you to earn interest while you save toward your goal.

Alternate CDs To Consider

Generally, banks do not increase the rates paid on a CD during its term, even if the market rate of interest has increased. In addition, banks also typically charge a penalty for early withdrawal. However, some financial institutions offer CDs with nontraditional terms to attract customers looking for more flexibility. 

Bump-Up CD

A bump-up CD comes with a one-time option to increase your interest rate for the rest of the CD’s term. The advantage is that you can take advantage of rising market interest rates, but you’ll have to request the increase and you can only do so once.

Step-Up CD

A step-up CD has an interest rate that increases at regular intervals. You’ll know up front when the rate will increase and by how much. This upfront information allows you to compare the yield with traditional CDs of the same term to get a sense of how competitive the rate is.

Liquid CD

A liquid CD, also known as a no-penalty CD, allows you to take your money out before the CD reaches maturity without paying a penalty fee—as long as you wait until at least seven days after opening the account. However, liquid CDs may offer lower rates than less flexible CD options.

Frequently Asked Questions (FAQs)

Where do you buy certificates of deposit?

Most CDs are issued by banks and credit unions. You can open an account in person or online, and the opening process is easy enough that it makes sense to shop around for a good rate. CDs from insured banks are covered for up to $250,000 by the Federal Deposit Insurance Corporation (FDIC), while CDs from insured credit unions are covered by the National Credit Union Administration (NCUA). 

Many brokerage firms also offer CDs, but not all brokerage CDs are insured. Brokered CDs often have higher minimum deposit requirements but may pay higher interest rates.

How do you calculate your returns with a certificate of deposit?

The return on a CD is a function of the interest rate, the length of time the deposit is held, and the number of times the rate is compounded. Banks quote the yield on CDs to show the interest rate you will receive based on these factors, as long as you leave your funds locked in for the full term. You can also use online CD calculators to help compare rates.

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