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Try These Smart Strategies for Investing in CDs

Certificates of deposit (CDs) are investments that help you grow your money safely, and using them can be as simple or as complicated as you want. If your needs are basic, it’s easy to put money into a CD and start earning more than you can earn in a savings account. But you can also add more complex strategies if you have specific goals or needs.

Basics of CDs

A CD is a type of account available at your bank or credit union. Similar to a basic savings account, you earn interest on the money you deposit. CDs typically pay higher interest rates than other bank accounts, but there’s a catch: You have to leave your money untouched in the account for a specific length of time. For example, a six-month CD is meant to be left alone for six months.

CDs are available in various terms ranging from six months to five years (or longer). Longer-term CDs usually pay more than shorter-term CDs because your commitment is greater, but there are exceptions. Some CDs also adjust the interest rate you earn over time. If you pull your funds out of a CD before it matures (before the specified amount of time passes), you’ll have to pay an early withdrawal penalty.

What Type of Investment Is a CD?

CDs are relatively safe investments when it comes to the risk of losing money in your account. At a federally insured bank or credit union, your CDs are protected up to $250,000. They are best for situations when you cannot accept the risk of losing your money. For example, you might have plans to buy a new home in two or three years, and you’re building up a down payment. You won’t need to spend the money in the immediate future, so locking it up for a higher interest rate could make sense.

For longer-term goals, like a retirement that is more than 20 years away, CDs might or might not be the right investment. It’s worth spending time with a fee-only financial planner to discuss your long-term goals and all of the options available to you.

Your money is only safe if it is FDIC insured, or covered under NCUSIF insurance when you use a credit union.

How to Invest in CDs

To buy a CD, just let your bank know which of their CD products you want (the six-month or the 18-month CD, for example) and how much money to put into it. Some banks have minimums ($1,000 or so) while others let you start as small as you want. You can often set up CDs online, especially at online-only banks.

When your CD matures, you should receive a notice explaining your options. In most cases, you can:

  • Let the CD renew (into another CD with the same length of time)
  • Buy a different CD (switching from a six-month to a one-year CD, for example)
  • Move the funds into a checking or savings account
  • Withdraw the funds

It’s best to review your reasons for using a CD and make a decision about what happens with the money—don’t just let it automatically renew every time. For more details, see What to do When Your CD Matures.

If you’re concerned about locking your money up, you might want consider liquid CDs, which allow you to withdraw some or all of your money before maturity without any penalty. 

Liquid CDs typically start with a lower rate than traditional CDs, but they offer flexibility.

There are several other types of CDs that allow for flexibility when it comes to withdrawals and interest rates. Check with your bank to find out what options are available to you. You may also want to shop around at multiple banks and credit unions to find the best CD choices and rates.

Investment Strategies

People often choose a CD based on the length of time they prefer, looking at interest rates and the amount of time they’re able to lock their money up. There’s nothing wrong with that approach—you’ll boost your earnings above what you’d get in a savings account, and a simple strategy is often the one that’s easiest to follow.

However, if you want to optimize your CD investing, there are several ways to manage your CDs.

Laddering is a strategy of buying multiple CDs with different maturity dates—from short-term to long-term maturities. This helps you keep money available and avoid investing all of your money when interest rates are at their worst.

A bullet strategy allows you to have all of your money available when your “goal” arrives. You can potentially earn more than you would have earned in a savings account, and you’ll be able to write a large check when the need arises.

A barbell approach sticks to short and long-term CDs (while skipping medium-term CDs). If medium-term interest rates are unattractive, you can just steer clear of them.

Investment Managers

If you don’t want to handle your CD investments by yourself, you can always hire somebody to do it for you. Of course, it’s important to know who you’re dealing with and avoid scams and Ponzi schemes. If you hire somebody, they may use brokered CDs, which are a little different from plain vanilla CDs in your bank account.

Be sure to ask the following questions of any investment manager:

  • Are my funds insured by the U.S. government?
  • When will I get my money back?
  • Is early withdrawal possible, and what is the penalty?
  • How much will I earn, and is this rate guaranteed?
  • Does the interest rate ever change?
  • Do you take custody of my money?

In addition to brokered CDs, some investment managers offer CDs that are linked to the stock market. Those instruments are extremely complicated, they might be hard to get out of, and they might not work the way you expect. For example, if the market rises by 10%, you might not receive a 10% credit on your account balance.

Before using market-linked CDs, ask what alternatives exist, and why a CD might make more sense than the alternatives. Then, research the features of any CD before you buy.

Money Market Accounts

CDs aren’t the only safe investments at your bank. Money market accounts also pay more than savings accounts, but they offer more flexibility than CDs: You might get a checkbook or debit card that you can use to spend from the account. However, withdrawals (or spending) might be limited to three times per month. See our list of the best money market accounts.

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