What Is a Barbell CD Strategy?

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DEFINITION
A barbell certificate of deposit (CD) strategy splits your money between short-term and long-term CDs, with no money invested in medium-term options. The benefit is that you get greater access to your money with the short-term CDs while taking advantage of potentially higher rates with the long-term CDs.

A barbell certificate of deposit (CD) strategy splits your money between short-term and long-term CDs, with no money invested in medium-term options. The benefit is that you get greater access to your money with the short-term CDs while taking advantage of potentially higher rates with the long-term CDs.

Definition and Examples of a Barbell CD Strategy

A barbell CD strategy is an investing technique that uses two extremes: long-term CDs with high yields and short-term CDs with low yields. The goal of this strategy is to maximize your yields while preserving flexibility.

  • Alternate name: CD barbell

For example, a common barbell CD strategy might be to divide your savings between short-term CDs with maturities of less than one year and long-term CDs with maturities of five years or more. The short-term CDs mature quickly (for example, in six or nine months), freeing up cash, while the long-term CDs provide greater yields.

A barbell CD strategy gets its name from the way the funds are clustered at either end of the maturity structure, much like a barbell has weights clustered at either end of the bar.

How Does a Barbell CD Strategy Work?

The barbell CD strategy has two ends. The first end, on the low-rate side, consists of short-term CDs that get rolled over regularly. This is great if you want to invest in CDs while still being able to reach short-term goals, fund unexpected expenses, or regularly shop around for higher rates

The other end consists of less liquid (less accessible) long-term CDs that are not rolled over as regularly. However, they have the potential to earn higher yields. The result of combining the two types of CDs is achieving medium-term yields while preserving some liquidity.

A barbell CD strategy gives you the best of both worlds: greater flexibility to use your money how you want, while taking advantage of higher interest rates.

Barbell CD Strategy Example

Suppose you have $25,000 in savings. You plan on using some of it to buy a new car in nine months and the rest for a down payment on a house in five years.

After shopping around for rates, you decide to use a barbell CD strategy with Ally Bank. So you split your money between two CDs: 

  • A nine-month CD with a 0.30% APY
  • A five-year CD with a 0.80% APY

Your average annual percentage yield (APY) is 0.55%. It’s less than you’d earn if you put it all in a five-year CD, but more than you’d earn if you just opened the nine-month option.

If you wanted to diversify even more, you could take that $25,000 and split it between several short-term and long-term CDs with Ally:

  • Three-month CD with a 0.15% APY
  • Six-month CD with a 0.20% APY
  • Three-year CD with a 0.65% APY
  • Five-year CD with a 0.80% APY

Your average APY would drop to 0.45% if you did this, but you’d have even greater flexibility to use your money when you wished. Depending on your goals, this could be a trade-off you’re willing to make.

Whom Is a Barbell CD Strategy Best For?

A barbell CD strategy can be a great option if you:

  • Have clear short-term and long-term goals you’re trying to reach
  • Want your idle cash to earn more than it could in a savings account or short-term CD but don’t like the idea of locking it all away in a long-term option
  • Are okay with earning a medium yield overall if it means greater flexibility to access your money when you need it

Barbell CD Strategy vs. CD Ladder

Barbell CD Strategy CD Ladder Strategy
Includes only short-term and long-term CDs; medium-term CDs aren’t used at all Includes a mix of short-term, medium-term, and long-term CDs
Example: You split $8,000 between a six-month CD and a five-year CD. Example: You split $8,000 between a six-month CD, a 15-month CD, a three-year CD, and a five-year CD.

A barbell CD strategy and a CD ladder both involve you putting your money into several CDs with a range of terms. However, barbell CD strategies use short-term and long-term CDs only, whereas CD ladders include terms of any length.

There’s also another CD strategy, known as the bullet approach, where you buy CDs that all mature at the same time.

Pro and Cons of a Barbell CD Strategy

Pros
  • Short-term CDs provide great flexibility

  • Long-term CDs give you the potential to earn higher yields

Cons
  • Locking some money up long-term could be risky

  • Excludes medium-term CDs

  • Early withdrawal fees

Pros Explained

  • Short-term CDs provide great flexibility: One of the biggest benefits of a barbell CD strategy is that some of your money matures more quickly than it would with a medium-term or long-term CD. At maturity, you can use that money to fund goals or look for better CD rates.
  • Long-term CDs give you the potential to earn higher yields: Another benefit of a barbell CD strategy is that the long-term CDs bump up your average yield and help you earn more interest than you would with just a short-term option.

Cons Explained

  • Locking some money up long-term could be risky: Before you commit to a barbell CD strategy, it’s important to examine your finances to determine how much money you can comfortably lock up long-term.
  • Excludes medium-term CDs: Some banks offer great yields on one-year, two-year, and other medium-term CDs. By excluding these from your investments, you could be missing out on potentially higher yields.
  • Early withdrawal fees: Most CD issuers will charge you an early withdrawal penalty if you pull money out of your CD before it matures.

Key Takeaways

  • A barbell CD strategy is where you split your money between short-term and long-term CDs, with no money invested in medium-term options.
  • A barbell CD strategy is best for those who have clear short- and long-term goals and feel comfortable managing their CDs on a rolling basis as the CDs mature.
  • Most barbell CD strategies average out to a medium-term yield.

Article Sources

  1. Capital One. "How Long Are CD Terms?" Accessed Feb. 15, 2022.

  2. HelpWithMyBank.gov. "What Are the Penalties for Withdrawing Money Early From a Certificate of Deposit (CD)?" Accessed Feb. 15, 2022.