Maximizing Your Returns with Certificates of Deposit (CDs)

Certificates of Deposit (CDs) offer a low-risk way to invest your money. By making an initial deposit, your investment will earn interest until the account matures. When the term ends, you’ll get your money back along with your earnings. Knowing how to invest in CDs strategically can help you maximize your returns. Here, we share three simple CD investment approaches to help your money go further.

Why Invest in CDs?

CDs can provide steady, fixed returns and help round out your financial portfolio. Here are a few reasons to consider investing in CDs:

Competitive Interest Rates

The average annual percentage yield (APY) on a traditional savings account was 0.45% as of July 2024, according to the Federal Deposit Insurance Corp. (FDIC). In that same period, some CDs offered APYs as high as 5.35%. Rates like these can help your money grow faster.

Peace of Mind

CDs offered by banks are generally FDIC insured for up to $250,000 per depositor. Credit unions offer similar coverage. This means that if the financial institution becomes insolvent, your money will be protected up to that point.

Guaranteed Returns

Investing in stocks is risky because the stock market is constantly in flux. That volatility can lead to big gains or significant losses. CDs, on the other hand, provide a guaranteed rate of return. The only real way to lose money with a CD is to pull your cash out before the term ends, which will likely trigger an early withdrawal penalty.

A CD can be a good holding place for money you don’t plan on spending in the immediate future. Terms typically range anywhere from one month to five years, which could allow you to earn higher-than-average interest on money you’re saving for:

• A down payment on a home
• A new business
• Your next vacation
• Home improvements
• A new car

How to Invest in CDs

Research Different CDs

When looking for the best CD, start by learning about the different types of CDs that are out there. For example, some don’t charge early withdrawal penalties; others allow you to bump up your interest rate during the CD term.

Consider Your Timeline

Think about when you want to have access to your money, which can help you determine the right CD term. This is especially important if you’re opening multiple CDs.

Shop Around

Check out CD offers from banks and credit unions, including brokered CDs. The latter may tout higher yields. You can also hold multiple CDs within a single brokerage account.

Open the Account

You can apply for a CD in person or online. You should receive a disclosure statement that outlines important information, like how often interest is paid and whether the CD is callable. You can then fund your account with the minimum opening deposit. Most require anywhere from $500 to $2,500 or more to get started.

Leave Your Money in the Account Until the Term Ends

Once your CD is up and running, there isn’t anything more to do on your end. You can expect to earn interest for the duration of the account term—just try not to pull money out before then, which will likely result in a fee.

3 CD Investing Strategies

Being strategic about how you invest in CDs can pay off in the long run. Here are three different approaches to consider:

CD Ladder

Building a CD ladder involves opening multiple CDs that have varying account terms. This spreads out the maturity dates, which can provide a stream of staggering returns.

How to do it: Let’s say you open three CDs with different terms (three months, nine months, and 12 months). As you reach each milestone, you’ll get back your initial investment, plus interest. You can then reinvest that money into a new CD, or use the funds however you like.

Who it’s best for: CD laddering can be a good method if you’re concerned about liquidity and don’t want all your money locked up in CDs for months (or years) on end. You might also come across better interest rates along the way.

Pitfalls to avoid: You’ll need to stay organized and know when each CD expires—and be aware that some CDs automatically renew. CD laddering also requires you to research accounts to find the best ones for your goals.

CD Barbell

With a CD barbell, you take a chunk of cash and divide it between two CDs—one long-term and one short-term. This lets you lock in potentially higher long-term interest rates without fully giving up access to your money.

How to do it: Research CDs that have rates and terms that support your goals. You may choose to split your funds evenly between the two accounts, or put more into one or the other. As each term ends, you can decide if you’d like to reinvest your cash or put that money toward a financial goal.

Who it’s best for: A CD barbell might make sense if you’re looking for a low-risk investment that allows you to keep a portion of your money accessible.

Pitfalls to avoid: Like a CD ladder, you’ll need to stay on top of your accounts and remember when each term ends. And if you do need to withdraw funds sooner than expected, you might be hit with a penalty.

CD Bullet

With a CD bullet, you open multiple CDs that all expire around the same time. When those maturity periods come around, you could be on the receiving end of a financial windfall.

How to do it: Start with your investing timeline and decide when you want to cash in on your CDs. If that’s a few years from now, you might open a three-year CD today—then a two-year CD a year later, and so on.

Who it’s best for: This can be an effective approach if you want to achieve a financial goal at a specific point in the future. That might be buying a home in five years or taking a European vacation within the next two years.

Pitfalls to avoid: As with all CD investing, interest rates could rise after you’re locked into your accounts. You’ll want to do your research to find the best rates and terms for your situation. Stock investing typically leads to better returns, but that’s never guaranteed. You’ll also be assuming more risk.

Frequently Asked Questions

Can CDs Lose Money?

CDs are generally considered a safe investment. The only real way to lose money with a CD is to withdraw your funds before the term ends, which will likely result in an early withdrawal penalty.

Should I Put All My Savings Into CDs?

While CDs can be a good investment, it’s important to stay diversified. The idea is to invest across a variety of different assets and classes. That could help you secure solid returns while mitigating risk.

How Do I Find the Best CD Rates?

Shop around and compare offers from different banks and credit unions. Look for CDs with competitive interest rates and terms that align with your financial goals.

The Bottom Line

When figuring out how to invest in CDs, think about your financial goals and timeline. That can point you to the right strategy and help you get the most out of your CD investment. Just be sure to stay diversified. The idea is to invest across a variety of different assets and classes. That could help you secure solid returns while mitigating risk.

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