How to invest with CDs

Investing in a certificate of deposit (CD) is one way to boost your savings. CDs generally grow interest with little-to-no risk, as long as they’re issued at either banks or credit unions that are insured by the Federal Deposit Insurance Corp. (FDIC), or the National Credit Union Administration (NCUA), respectively.

What is a CD?

A CD is a timed deposit account that earns a fixed rate of return during a defined period of time, or term. In exchange for a guaranteed yield, you agree to keep your money in the account, untouched, until the CD’s term expires. During that period, the money in the CD accrues interest, compounding at regular intervals.

CDs are best used for money you won’t need before the term is up. Accessing the money prior to that, however, results in an early withdrawal penalty that could wipe out some, or all, of the interest earned.

Plenty of banks and credit unions offer high yields on their CDs, and you can develop a strategy for investing in one or several CDs with varying term lengths, depending on your goals.

Here are some factors to consider when choosing a CD investment strategy.

Are CDs a good investment?

For risk-averse investors, CDs could make sense as part of a diversified portfolio: They offer a guaranteed return on your money that you don’t need right away. That could be an advantage when rates are high. And in November 2024, even as we’re in a declining interest rate environment, you can find CDs with yields that are still outpacing inflation.

Other low-risk investments, such as money market accounts and online savings accounts, may offer better returns and features for savers, depending on their needs. Nevertheless, a CD still provides a better return than most savings accounts.

Steps to get started investing in CDs

Start by comparing CD rates to get a sense of where you’ll find the most attractive earning potential and which term lengths match up with your end goals. For example, if you’re looking to make a down payment on a house in three years, look for CDs that mature before the three-year mark.

Then, think about how much money you can confidently deposit and stash away for the length of the CD term.

Use Bankrate’s CD calculator to determine what you will earn before you decide to open a CD.

How much can you make by investing in a CD?

Potential earnings from CD investments are based on a few key factors:

• The amount you deposit
• The CD’s interest rate
• The maturity date

Let’s say, for example, that you deposit $20,000 in a 3-year CD that pays a 3.10 percent APY. You would earn $1,918.26. To get a good idea of how much you may be able to earn from a CD investment, use Bankrate’s CD calculator.

What is the minimum investment for a CD?

The amount required to invest in a CD depends on where you want to open it. For example, Capital One has no account minimum balance requirement, while one CD option at Bank of America requires depositing at least $1,000.

CD investing strategies

Many CD investors opt for a more in-depth strategy than simply choosing one CD for their funds. Because CDs are available in a range of terms (or maturities), you can consider purchasing multiple CDs with different term lengths – some shorter, some longer – to maximize your earnings while freeing up some of the funds sooner for reinvestment. Here are three such strategies:

Laddering

CD laddering is arguably the most common CD investing approach. For example, let’s say you have $6,000 you plan to invest in CDs. Here’s how a ladder might look:

• $2,000 in a 1-year CD
• $2,000 in a 2-year CD
• $2,000 in a 3-year CD

When the 1-year CD matures, you reinvest the principal and interest earned in another CD, preferably one that earns higher interest. When the two-year CD matures, reinvest the funds into another new CD, and so on. This way, your money is regularly maturing, and that gives you two key benefits.

First, if you need access to some of the funds, you can access them upon the next maturity date which, in the above example, is fairly close. Second, you’ll hopefully be able to take advantage of higher interest rates when you reinvest to continue to maintain the ladder. It’s important to note that you don’t have to divide the funds equally (as in the example above). You can, however, choose any amount in each CD, in order to maximize earnings on CDs with higher rates.

Barbell

While a ladder has multiple steps with even space between them, a barbell skips all those middle rungs in favor of short-term and  long-term CD investments. For example, a barbell might look like this:

• $2,000 in a 1-year CD
• $2,000 in a 5-year CD

The benefit of pairing long-term investments with short-term ones is that the investor can use shorter term CDs to take advantage of higher rates, while the longer-term CD serves as a safety net in case rates fall. Currently, top yielding 1-year CDs are earning more than 4.40 percent APY, and 5-year CDs are earning more than 4.30 percent APY.

Bullet

With a CD bullet strategy, you pick a target date for the bullet and invest in CDs accordingly. So, you might invest in a 5-year CD today. Next year, you invest in a 4-year CD, and the following year, you invest in a 3-year CD. All of the CDs will mature around the same time, so the bullet strategy may be good for investors looking to achieve a specific goal by a certain date.

A benefit of the bullet strategy is you won’t have to invest the entire amount at one time, and there’s a chance you’ll be able to pick up higher rates along the way on the shorter-term CDs.

Different types of CDs

All CDs aren’t created equally. If you’re comparing CD investments, here’s a rundown of some of the common alternatives to traditional CDs:

Bump-up CD

A bump-up CD gives you the option to request a rate increase a certain number of times during the term. So, let’s say you open a 2-year CD with a 1.50 APY, and eight months later, the rate is 2.00 APY. You can ask for the increase. Typically, these CDs only allow for one increase per term and they generally make the most sense when rates are rising.

Step-up CD

A step-up CD is similar to a bump-up CD except the bank does the work for you. You’ll have an idea of the rate increases before you open. For example, U.S. Bank’s 28-month CD starts with a 0.05 percent APY and increases by 0.2 percent every seven months.

No-penalty CD

With a no-penalty CD, the name says it all. You don’t have to worry about handing over any earnings if you make a withdrawal before the maturity date – and generally at least seven days after making your deposit.

Add-on CD

Add-on CDs function more like a standard savings account. After you open the CD, you can make additional deposits to the principal. Some add-on CDs allow for unlimited additional deposits, but others may have limits on how many contributions can be made. The downside is that they may earn less than standard CDs.

Callable CD

Callable CDs put more power in the bank’s hands to call – close out – your CD. For example, let’s say your CD is paying a 3 percent APY. If interest rates drop and the bank doesn’t want to pay that much interest, it can call (close) your CD.

Can you lose your money in a CD?

As the saying goes, anything is possible. For CDs, the answer is often no, provided you keep your money locked in the CD until the maturity of its term.

CDs come with a guaranteed, or fixed, rate of return — meaning the rate you get when you open a CD stays the same until its maturity. What’s more, the money you earn from interest, plus the principal balance, are protected by federal insurance, as long as the issuing bank or credit union is part of the FDIC or NCUA, respectively. Federal insurance covers up to $250,000 per FDIC bank or NCUA credit union, per depositor and per ownership category.

An investor could lose money from a CD in the form of a withdrawal penalty if they withdraw funds before the CD’s maturity date. The penalty could eat into earnings or even some of the principal balance, so it’s important to only open a CD that you can confidently commit to, leaving your money in the account, untouched, until its maturity date.

Mistakes to avoid

Opening a CD is a simple process, but there are some stumbling blocks that can get in your way. Avoid these errors to make sure you’re maximizing your earnings and minimizing your chances of penalties.

• Forgetting to account for inflation: Though at this time you can find CDs outpacing the current inflation rate, you have to account for inflation when choosing a CD. CD APYs now might outpace for a while or inflation could rise above that CD yield.
• Choosing the first CD you see: Many banks and credit unions offer CDs, and these offerings come at varying terms and yields. You can use Bankrate’s best CDs list to compare some options.
• Failing to consider penalties and more flexible alternatives: An investor may want to consider other types of CDs besides traditional CDs. A no-penalty CD, for example, may be a good option for an investor looking for more flexibility with their deposit.

Portfolio construction

Let’s look at a CD ladder with $15,000 that bets on interest rates continuing to rise during the year. If you’re banking with Ally Bank, for example, it might look like something like this:

• $5,000 in a 6-month CD with a 4.20 percent APY
• $5,000 in a no-penalty CD with a 4.00 percent APY: While this yield is equal to the bank’s standard 1-year CD, it’s still higher than the bank’s 3-month CD.
• $5,000 in the bank’s 2-year Raise Your Rate CD: This is a bump-up CD with a current 3.40 percent APY. Although we’re currently in a declining interest rate environment, if rates were to increase, you can take advantage of extra earning ability. But an 18-month regular CD at Ally currently has a higher yield than the 2-year rate-bump CD.

Again, it’s important to note that the amounts in a ladder do not need to be even across all maturity dates. How you allocate funds in the CD ladder depends on your cash flow needs and projected goals.

Bottom line

Investors looking for a low-risk investment with a guaranteed rate of return have many FDIC- and NCUA-insured regular CD options to choose from.

CD rates are competitive in this current rate environment, which makes it all the more important to shop around and find the best rates for the terms you’re seeking. Additionally, you might consider an investment strategy that takes advantage of multiple CDs at different term lengths. Just be aware of penalties for taking money out of the CD earlier than its maturity date.