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How To Invest In CDs: 3 Strategies to Optimize Your Savings

Lauren Brown Updated: October 3, 2023 • 6 min read
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Key Points:

  • A Certificate of Deposit (CD) is a special savings vehicle.

  • At the end of the CD term, also known as its maturity, you will receive your initial investment back plus the promised interest.

  • Unlike variable rate accounts, CDs offer a fixed interest for the term, ensuring predictable growth.

If you are searching for a low-risk investment, you are likely considering a Certificate of Deposit (CD). This financial instrument provides a fixed return at its maturity. If you are comfortable committing to a specific investment period, you may still wonder how to invest in CDs and how to open a CD account. This guide will help you learn the basic strategies for CD investing, helping you answer the question, “Is opening a CD worth it?”

Investing in CDs offers an avenue for growing your savings with predetermined returns.

How Does A CD Work?

A Certificate of Deposit (CD) is a special savings vehicle. When opening a CD account, you agree not to withdraw your money for a predetermined period. In return, the bank or financial institution offering the CD provides a fixed interest rate, usually higher than a regular savings account. At the end of the CD term, also known as its maturity, you will receive your initial investment back plus the promised interest.

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Why Invest In CDs

CDs can be a low-risk investment, though, like any financial instrument, they are not always suitable for every investor. Here are a few reasons why you might consider opening a CD account:

  • Guaranteed interest rate: Unlike variable rate accounts, CDs offer a fixed interest for the term, ensuring predictable growth.
  • Higher returns: CDs typically offer better returns than regular savings accounts over the same period.
  • Safety: In the United States, CDs have coverage from the Federal Deposit Insurance Corporation (FDIC) up to a specific limit, which can reduce your risk of losing money if the bank or financial institution fails. The limit on FDIC insurance coverage is currently $250,000 per depositor, per issuer.
  • Diverse terms: CDs have a range of durations from short-term to long-term. This means you can select a term that aligns with your financial goals.

CD Related Articles 

CD Investment Strategies

Investing in CDs is not just about opening a CD account and waiting until it matures. You can apply various investment strategies, each with unique advantages and tailored to specific financial needs. From CD ladders to barbells and bullets, understanding these techniques can enhance the benefits you receive from your investment.

Strategy 1: CD Ladder

A CD Ladder is a popular strategy where you divide your investment across multiple CDs with varying maturity dates. With this strategy, you benefit from the higher rates of longer-term CDs while maintaining liquidity and regular access to part of your money. Upon maturity of the CDs, you can reinvest the funds if you choose.

A CD ladder works by dividing your money into different CDs. For example, if you have $500,000, instead of putting it all in a single 5-year CD, you can spread it across a 1-year, 2-year, 3-year, 4-year, and 5-year CD. Each $100,000 CD will provide a different interest rate, with the 5-year term yielding more than the shorter-term investments. You can reinvest the proceeds at maturity to maintain the ladder. This means that when the 1-year CD matures, you can purchase a new 5-year CD. Over time, you create a ladder pattern where a CD matures annually and then gets reinvested, optimizing both liquidity and return.

Strategy 2: CD Barbell

The CD barbell strategy focuses on short and long-term CDs, with minimal medium-term investments. To understand the strategy, picture a barbell: weights on both ends and a bar in the middle. This is similar to how your portfolio would look under a barbell approach. A CD barbell strategy works by putting the bulk of your money in short-term and long-term CDs and fewer in mid-length terms. The benefit of a CD barbell approach is similar to a CD ladder; it prioritizes liquidity and access to cash while also seeking higher yields from longer-term CDs.

An example of a CD barbel would be taking your $500,000 initial investment and purchasing $250,000 each of 1-year and 5-year CDs. The 1-year investments will mature quickly, offering you liquidity and the option to reinvest in additional CDs if desired. The 5-year CDs take longer to mature but provide higher interest, offering a balance to the barbell.

Strategy 3: CD Bullet

The CD bullet strategy helps with funding a specific goal as all CD purchases mature at the same time. This allows you access to your money when needed. Often, people choose a maturity date based on the requirement for post-secondary education funding, a home purchase, or another sizable financial goal.

A CD bullet approach works by opening a CD account with a long-term CD. You will buy another CD each subsequent year with a one-year shorter maturity. You can repeat this process as often as necessary, concentrating the maturity around one specific date. Careful planning and yearly investments are crucial to ensure your CDs mature together.

Imagine, for example, that you are planning to purchase a home five years from now. Using the CD bullet strategy, in the first year, you will buy a CD that matures in five years. The following year, you purchase a 4-year CD, and so on. By the end of the fifth year, all CDs mature together, offering a lump sum exactly when needed for your downpayment.      

Where Can I Buy CDs?

Many banks and credit unions allow you to submit a CD application, which makes purchasing the investment relatively straightforward. Both brick-and-mortar institutions and online-only banks offer CD options, allowing you to open CD account online. Brokerage firms may also provide CD products, though brokered CDs differ from traditional CDs in many ways.

Regardless of where you buy your CD, consider comparing rates and terms to ensure you get the best deal tailored to your investment goals. Each financial institution may offer different interest rates and maturity options, so your due diligence will likely pay off.

How To Buy CDs

These are the basic steps for how to open a CD account and how to invest in CDs:

  1. Research and compare: Visit financial websites, banks, credit unions, or brokerage firms to compare the best CD rates.
  2. Determine your investment duration: Decide on the term length for your CD. This can range from a few months to several years. The longer the term, the higher the interest rate usually is.
  3. Decide the amount: Some CDs may have minimum deposit requirements, while others allow flexible investment. You can determine how much you want to invest based on your goals while considering the FDIC insurance coverage limit of $250,000 per issuer.
  4. Understand early withdrawal penalties: Before committing, you may want to familiarize yourself with potential fines for accessing funds before the CD's maturity date.
  5. Fill out a CD application: Whether you open a CD account online or in person, you must provide your details, including your name, address, and Social Security Number.
  6. Funding: After the CD application approval, you can fund the investment using a bank transfer, check, or another method provided by the financial institution.
  7. Monitor and renew: Once your CD reaches maturity, decide whether to withdraw the funds or roll it over into a new one.

Following these steps will help you open a CD account and benefit from the investment.

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Bottom Line

If you wonder, “Should I open a CD account?” the answer may be yes. Investing in CDs offers an avenue for growing your savings with predetermined returns. When deciding how to invest in CDs, you can use several strategies, including a CD ladder, CD Barbell, and CD bullet. Understanding these strategies and purchase processes allows you to tailor your investments to fit your financial goals and timeline.



Are CDs a safe investment?

CDs are a low-risk investment because they have a fixed interest rate and have insurance coverage by the Federal Deposit Insurance Corporation (FDIC). This insurance means your original principal has protection up to $250,000 per depositor per institution.

Can I make money from my CD before it matures?

Opening a CD account means agreeing to hold the investment until maturity. You can often access your money sooner if needed, though you will have an early withdrawal penalty. These penalties can be significant, negating some or even all the interest earned.

Should I put all of my money into a single CD?

Placing all your money in a single CD may not optimize for risk, especially considering the Federal Deposit Insurance Corporation (FDIC) limit of $250,000 per depositor. Spreading funds across multiple CDs or other FDIC-insured accounts can help ensure maximum insurance coverage and help minimize risk.

Written by Lauren Brown linkedin-icon

Lauren has over a decade of experience in wealth management and financial planning. She is a CFA charterholder and holds a Bachelor's degree in Finance. Lauren has worked with several asset management firms, offering wealth advisory and portfolio management services to high-net-worth clients.