What Is a Bullet CD Strategy?

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DEFINITION
A bullet certificate of deposit (CD) strategy is a method of buying several CDs that mature at the same time. It can be a great way to save over time if you'll have a big expense in the future, such as your child’s college education or a down payment on a house.

A bullet certificate of deposit (CD) strategy is a method of buying several CDs that mature at the same time. It can be a great way to save over time if you'll have a big expense in the future, such as your child’s college education or a down payment on a house.

Definition and Examples of a Bullet CD Strategy

A bullet CD strategy involves buying several certificates of deposit that will mature at roughly the same time. You'd typically buy these CDs over the course of several years, but you structure them so that all your money becomes available at the same time.

It would be a bullet CD strategy if you bought a three-year CD one year, a two-year CD the next year, and a one-year CD the next year.

A bullet CD strategy gets its name because you target a specific date of maturity, with the same precision as a bullet.

How Does a Bullet CD Strategy Work?

The main goal of a bullet CD strategy is to make sure all your CDs mature around the same time. It’s a good strategy for anyone saving for a big long-term goal, such as buying a home, doing a big renovation, funding their kid’s college, or saving for retirement.

Suppose you’re saving for a down payment on a house. Your goal is to save $10,000 a year for the next five years, so you decide to use a bullet CD strategy that looks like this:

Your CDs mature around the same time after five years, even though you bought them over the course of several years. This is a bullet CD strategy in action.

You can also use a bullet strategy to invest in bonds. It involves buying bonds that have the same maturity date, similar to a bullet CD strategy.

Bullet CD Strategy vs. Barbell CD Strategy vs. CD Ladder

There are two other popular CD strategies you can use if the bullet CD strategy isn’t right for you: a barbell CD strategy and a CD ladder. The following table highlights the differences.

Bullet CD Strategy Barbell CD Strategy CD Ladder Strategy
How It Works You buy CDs over the course of several years that all mature at the same time. You buy a mix of short- and long-term CDs all at once while ignoring medium-term CDs altogether. You buy a mix of short-, medium-, and long-term CDs that mature gradually over time.
Best for Saving for a big future expense Saving for a mix of short-term and long-term expenses Incremental access to your money over time
Example Example: You buy a five-year CD one year, a four-year CD the next year, a three-year CD the next so that they all mature at once. You split your savings between a six-month CD and a five-year CD. You use the six-month CD to cash flow short-term goals and the long-term CD for potentially higher yields. You split your savings between a six-month CD, a 15-month CD, a three-year CD, and a five-year CD all at once so you have access to your money on a rolling basis.

Be aware of early withdrawal penalties no matter which CD strategy you use. These penalties could apply if you need your money and withdraw it before maturity.

Pros and Cons of a Bullet CD Strategy

Pros
  • You don’t have to save all your money at once

  • It ensures you'll have money when you need it most.

Cons
  • All CDs mature at once, limiting your access to your money.

  • You’ll have to stay on top of maturity dates.

Pros Explained

  • You don’t have to save all your money at once: Most people gradually save up for big purchases over time. This works perfectly with a bullet CD strategy because you can slowly lock away your money as you save your next big chunk.
  • It ensures you have the cash when you need it most: You’re guaranteeing that money will be available when it’s time to make the purchase by choosing a maturity date that aligns with your big expense.

Cons Explained

  • All CDs mature at once: The biggest downside of a bullet CD strategy is that access to your money is more limited than it would be with a CD ladder or a barbell CD strategy. Everything becomes available at the same time.
  • You’ll have to stay on top of maturity dates: A lot of CDs automatically renew after a 10-day grace period. You’re relocked into another CD with the same exact term if you don't get your money out within that time frame.

Always review your finances before opening a CD to make sure you can comfortably lock up your savings until the term expires. You could face early withdrawal penalties otherwise.

Key Takeaways

  • A bullet CD strategy is where you buy CDs over the course of several years that all mature at the same time.
  • One example of a bullet CD strategy would be if you bought a three-year CD in one year, a two-year CD the next year, and a one-year CD in the third year.
  • A bullet CD strategy could be a good choice if you’re saving up for a big future expense, such as a new home, a new car, your child’s college education, or retirement.
  • Two alternative strategies to a bullet CD are a barbell CD and a CD ladder.


Article Sources

  1. Charles Schwab. "Fixed Income FAQs."

  2. Massachusetts Institute of Technology. "A System for Bank Portfolio Planning," Page 467.

  3. The Tennessee Credit Union. "How to Build a CD Ladder."