Strategies for Capitalizing Through Certificates of Deposit (CDs) Investment
Cool beans! Here's the lowdown on CDs, or Certificates of Deposit. These bad boys offer a reliable way to grow your savings with little to no risk. Crazy, huh?
What's up with CDs?
CDs are basically savings accounts that provide a guaranteed return over a fixed period, called the term. In return for this guaranteed payday, you promise to leave your cash parked up for the duration. Your savings will grow with interest, compounding like a boss during the term.
CDs are best for that stash you can keep hibernating until the term ends. Pulling money before the maturity date is a no-go, unless you wanna pay an early withdrawal penalty, which could take a big chunk out of your earnings – or even your principal.
So, wanna start investing in CDs? Here's how:
- Set your CD investing goals, like stashing cash for a down payment three years down the line.
- Compare the best CD rates and find the juiciest yields.
- Choose the perfect CD term that aligns with your plans and timeframe.
- Decide how much you can peacefully park away until the term's up.
- Use our nifty CD calculator on our website to project your earnings.
- Open your CD account and fund your initial deposit.
1-year
Still worth it, despite lower rates
$2,000
Even though rates have dipped in 2025 following the Federal Reserve's rate cuts, you can still find CDs with yields that outpace the 2.4% inflation rate:
5.00%
- The best 1-year CDs are bringin' in over 4.00% APY.
- 3-year and 5-year CDs are Presidential, earnin' around 4.00% APY.
- The top 6-month CD rates sit at 4.20% APY.
$2,100
Locking in those sweet rates in longer-term CDs now could be pretty beneficial, before they plummet even further. A CD ladder strategy lets you take advantage of high yields while keeping some flexibility.
Other low-risk investments, like money market accounts and online savings accounts, might offer better returns and features, depending on your needs though. Nevertheless, a CD still provides a better return than most traditional savings accounts, which are averaging 0.59% APY nationally.
2-year
Insider tip: When to lock in CD rates
$2,000
"With the Fed expected to keep cuttin' rates through 2025, now might be a good time to consider lockin' up these higher CD rates, especially for longer terms. Just remember to pay close attention to early withdrawal penalties – if you think you might need the dough sooner, a no-penalty CD could be a better choice, albeit with a slightly lower yield."
4.75%
- Greg McBride, CFA, our website Chief Financial Analyst
$2,196
How much cash can you score?
Your earnings depend on a few key factors:
3-year
- How much you save
- The CD’s interest rate
- The length of the term
- Whether the interest compounds
$2,000
For example: if you invest $20,000 in a 3-year CD with a 3.10% APY, over the 3-year term, you'd earn $1,918.26 in interest. Give our CD calculator a whirl to calculate your specific earnings.
4.50%
The minimum deposit needed to open a CD varies by institution. Some banks, like Capital One, don't require a minimum deposit. Others, like Bank of America, might require $1,000 or more to open certain products.
$2,281
CD investing strategies
Many CD investors use strategies involving multiple CD terms to optimize returns while maintaining some liquidity. Here are three popular strategies:
4-year
CD Laddering
$2,000
CD laddering is the most popular approach. Grab this scenario: if you have $10,000 you're eager to invest in CDs:
4.40%
- $2,000 in a 1-year CD
- $2,000 in a 2-year CD
- $2,000 in a 3-year CD
- $2,000 in a 4-year CD
- $2,000 in a 5-year CD
$2,370
When the 1-year CD matures, you reinvest that sweet, sweet cash and interest earned into a new 5-year CD. When the 2-year CD matures, you reinvest the dough into another new 5-year CD, and so on. This way, your money's gonna keep poppin' up, and that comes with two major benefits:
- If you need some dough, you can get it by the next maturity date (which might be pretty soon, like in the above example).
- You'll hopefully be able to take advantage of higher interest rates when you reinvest to maintain the ladder.
5-year
Barbell strategy
$2,000
While a ladder has multiple steps with even space between them, a barbell skips all the middle rungs for short-term and long-term CD investments. A barbell could look like this:
4.30%
- $5,000 in a 6-month CD
- $5,000 in a 5-year CD
$2,464
The beauty of pairing short-term investments with long-term ones is that the investor can use short-term CDs to capture higher rates while the long-term CD serves as a safety net in case rates plummet.
This strategy works fantastic in uncertain rate environments. If rates rocket after your short-term CD matures, you can reinvest at a higher rate. If rates drop, you still have cash parked in the long-term CD at the original, safer rate.
Bullet strategy
With a CD bullet strategy, you pick a target date for the bullet and invest in CDs accordingly. For example, you might drop $5,000 into a 5-year CD today. Next year, you might invest $5,000 into a 4-year CD, and the following year, you'd invest $5,000 into a 3-year CD. All the CDs will mature around the same time – perfect for investors aiming to reach a specific goal by a specific time.
A benefit of the bullet strategy is that you won't have to invest the entire amount at once, and there's a solid chance you'll be able to snag higher rates on the shorter-term CDs as they mature.
2025
Varieties of CDs
5-year CD
All CDs ain't created equally. If you're considering CD investments, here's the scoop on some popular alternatives:
$5,000
Bump-up CD
2030
A bump-up CD lets you ask for a rate increase a certain number of times during the term. For example, let's say you open a 2-year CD with a 4.00% APY, and eight months later, the rate jumps to 4.50%. You can request the bump. Typically, these CDs only let you ask for one increase per term, and they make sense when rates are expected to rise.
Step-up CD
2026
A step-up CD is similar to a bump-up CD, except the bank handles the bump for you. You'll have an idea of the rate increases before you open. For instance, a bank's 28-month CD might start with a 4.00 percent APY and nudge up by 0.25 percent every seven months.
4-year CD
No-penalty CD
$5,000
A no-penalty CD lets you chill without worrying about handing over any hootchie-money if you yank it before the maturity date – and usually with at least seven days' notice. These typically offer slightly lower rates than regular CDs but provide much more flexibility.
2030
Check out the best no-penalty CD rates.
Add-on CD
2027
An add-on CD behaves a bit like a standard savings account. Once you open the CD, you can toss more cash into the principal. Some add-on CDs allow unlimited additional deposits, but others have limits on how many contributions you can make. The downside is, they may earn less than standard CDs.
3-year CD
Callable CD
$5,000
A callable CD hands more power to the bank to shut down, or "call," your CD. For example, let's say your CD promises a 4.5% APY. If interest rates swoop down and the bank isn't keen on doling out that much interest, it might call your CD. These CDs may offer chunkier rates to compensate for the risk – approach with caution.
2030
Jumbo CD
Jumbo CDs generally require a minimum deposit of $100,000, although some banks set the minimum at $50,000 or $25,000. They may offer higher returns for the larger deposit, although it's not always the case.
2028
Peep the best jumbo CD rates.
2-year CD
Can you lose your money in a CD?
$5,000
As long as your CD is with an FDIC- or NCUA-insured institution, and you keep the funds in the CD until maturity, there's virtually no risk of losing your nuts – er, your principal. Your initial deposit and earned interest are federally insured up to $250,000.
2030
The main way CD investors can lose their cash is by tugging it before the CD's maturity date. Early withdrawal penalties can gobble up your earned interest and potentially even your principal.
2030
There's also the risk that inflation might outpace your CD's yield, meaning your cash loses its purchasing power over time, even though the nominal value increases.
2029
Opening a CD's a simple process, but there are some bumps in the road that could hamstring your returns or land you with a penalty. Avoid these pitfalls:
1-year CD
- Neglecting inflation: Though at this time you can find CDs outpacing the current 2.6% inflation rate, you must consider inflation when picking a CD. CD APYs today might outpace inflation for a while, or inflation might rise above that CD yield, eroding your real returns.
- Grabbing the first CD you see: Many banks and credit unions offer CDs, and they're dished out with varying terms and yields. You can use our website's best CD list to compare some options. Online banks often offer markedly higher rates than bricks-and-mortar institutions.
- Ignoring penalties and more flexible alternatives: An investor may wanna consider other types of CDs besides traditional CDs. A no-penalty CD, for instance, could be a brilliant choice for an investor needing more flexibility with their deposit, even if it comes with a slightly lower yield.
- Ignoring diversification: Plunking all your cash into a single long-term CD could mean missing out on higher rates if interest rates shoot up. Consider spreading your investment across multiple CDs with different terms using one of the strategies outlined above.
- Skipping over automatic renewal settings: Many CDs automatically renew at maturity, which could be dismal if they renew at less favorable rates. Make sure you're familiar with your bank's renewal policy and mark your calendar to check your options before the CD matures.
$5,000
- To supplement your personal-finance plan, you might want to explore money market accounts and savings accounts in addition to CDs, as they could offer better returns and features depending on your needs.
- If you're considering savings accounts, you should know that CDs may still provide a better return than most traditional savings accounts, which are currently averaging 0.59% APY nationally.
%20Investment){kind=link}