Landing on the right Certificates of Deposit (CD) that will help you earn more while you save, takes research, shopping around for rates, and making sure you have terms that align with what you want to financially achieve by a certain time.
Don’t get us wrong, CDs are an easy low-risk way to reach your savings goals, where you can just set it, forget it, and enjoy it once it’s ready, but the one thing CDs teach us is patience. Patience to leave it where it is with strategies in place to get liquidity while avoiding early withdrawal penalties.
But what if we told you there’s a way to utilize CDs, where you can access funds at different times based on when you want to achieve different financial goals – retirement, tax payments, vacation, a new car, a downpayment on a house? The options are endless.
As you think about what you’d like to financially achieve in a certain period of time, here are three CD strategies that will help you optimize and plan your CD funding.
CD Bullet
If you have a target date that you’d like access to your funds, the CD Bullet is what you’re looking for. Just like an actual bullet, the CD Bullet strategy targets a date in which the saver opens several CDs over several years that will mature around the same time.
This is a great way to fund long-term savings goals – buying a house, funding college tuition, taking a dream vacation, or saving for retirement with the best CD rates.
Breakdown of CD Bullet:
- Year 1: Invest $5,000 in a 5-year CD
- Year 2: Invest $5,000 in a 4-year CD
- Year 3: Invest $5,000 in a 3-year CD
- Year 4: Invest $5,000 in a 2-year CD
- Year 5: Invest $5,000 in a 1-year CD
- End of Year 5: All five CDs have matured, and your principal of $25,000 is available plus interest.
CD Ladder
“Laddering” is the process of opening several CDs, each with different terms, so that you have a set schedule of funds becoming available providing needed liquidity. This could be to meet an expected cash flow, such as tax payments, quarterly or annual tuition payments, or funding a home renovation. Or it can be a way to keep funds invested until you need them.
For example, you open four CDs, each for $50,000 but with respective terms of 3-, 6-, 9-, and 12-months. Over the coming year, $50,000 will be available every 3 months. Each time a CD has reached its maturity, you’re able to access some or all the cash. Or you can set it up to let each CD roll over into a new 12-month CD, retaining the same 3-month availability in the coming year, while still earning the higher rates typically offered for CDs.
Breakdown of CD Ladder:
- Start: Open four CDs for $50,000 each with terms of 3-, 6-, 9-, and 12 months
- End of 3 months: 3-month CD matures, principal of $50,000 plus interest is available.
- End of 6 months: 6-month CD matures, principal of $50,000 plus interest is available.
- End of 9 months: 9-month CD matures, principal of $50,000 plus interest is available.
- End of 12 months: 12-month CD matures, principal of $50,000 plus interest is available.
CD Barbell
This may not be a strategy you’d add to your physical workout routine, but exercising a CD Barbell gives you the savings results you’re looking for by splitting your investments in two, short- (12 months or less) and long- (five years or more) term CDs.
This is beneficial when you have two savings goals on different timelines. A two-ended Barbell strategy allows you to take advantage of a long-term CD’s higher, fixed interest rate while a short-term CD allows you to reach short-term savings goals, provides early access to funds, or gives you the ability to reinvest in CDs with possible higher rates.
Breakdown of CD Barbell:
- Start: Split $10,000 between a 12-month CD (short-term) and a 5 year CD (long-term).
- End of 12 months: Short-term principal of $5,000 is available plus 1 year of interest.
- End of 5 years: Long-term principal of $5,000 is available plus 5 years of interest.
Final Takeaway
Understanding how you can further utilize the low-risk and high-return of CDs can help you reach your savings goals in time frames that align with your financial needs. Whichever strategy you choose to achieve your savings goals — long-term or set scheduled — get the most out of your CD by patiently waiting until it reaches maturity, maximizing your earnings.
FAQs
Q: Which strategy is best for long-term savings goals?
The CD Bullet strategy is ideal for long-term goals, providing flexibility and higher rates by staggering CD terms over several years.
Q: Can I reinvest with the CD Ladder strategy?
Yes, you can choose to reinvest each matured CD into a new 12-month CD, maintaining a 3-month availability schedule while earning higher rates.
Q: How do these CD strategies optimize savings?
These strategies offer flexibility and liquidity, allowing you to align CD investments with specific financial goals, maximizing returns and financial success.
