How To Invest In CDs: Everything You Need To Know

Learn how to invest in CDs in less than 5 minutes

Are you tired of seeing your hard-earned money languish in a savings account? The good news is… you don’t have to settle for that measly 0.02% interest rate in your Bank of America account. You can turbocharge your returns without any additional risk by investing in a Certificate of Deposit (CD).

With many CDs paying 200 to 265x the rate of a standard savings account, you will find that they make the perfect addition to any portfolio, no matter your financial goals. 

In this comprehensive guide, we will walk you through everything you need to know about how to invest in CDs. From understanding the different types to implementing a complete CD strategy, you will discover how easy it is to unlock your savings potential with CDs. Let’s get going!

What Is A CD?

When you open a Certificate of Deposit, you agree to deposit a set amount of money with an institution for a fixed duration. This timeline is known as the CD’s maturity

In exchange for the temporary deposit, the institution agrees to pay you a guaranteed interest rate for the life of the CD. And because you agree to not withdraw your funds, financial institutions are willing to compensate you with higher interest rates.

And, best of all, CDs are backed by FDIC insurance up to $250,000. This makes them as safe as checking and savings accounts and a predictable way to earn passive income.

Pro tip: If you have over $250,000 to invest, consider spreading your funds across several institutions to maximize your FDIC protection.

The main drawback of CDs is that your funds are inaccessible.

If you withdraw your funds before maturity, you will incur early-withdraw penalties. For this reason, they are best used if you have already established an emergency fund. That way, even if the unexpected happens, you won’t need to tap your CDs. 

Why Invest In CDs?

While CDs may not offer as high of returns as riskier investments, they still deserve a place in most financial plans.

Let’s take a look at some of the key advantages of CDs:

  • Peace of mind: Backed by FDIC insurance, they offer a level of security not found with most other investments.
  • Higher rate of return: CDs offer better rates than traditional savings or money market accounts, making them an attractive option for those looking to grow their savings.
  • Planning for the future: They are ideal when planning for a large purchase because you can lock in a solid interest rate for a specific term, unlike savings accounts with variable rates.
  • Out of sight: CDs allow you to shift your savings out of sight and out of mind, making it harder to access the funds impulsively.
  • Flexibility: Compared to annuities, CDs offer more flexibility while providing a predictable income stream. Upon maturity, you can decide to renew your CD or invest the money in other assets.

Where Can I Buy CDs?

While many people associate CDs with their local brick-and-mortar bank, you have more options than you might think when it comes to buying these financial products. Here are some alternatives to consider:

Online banks: Online banks have become an increasingly popular place to purchase CDs, due to their flexibility and selection. They often offer the best public interest rates, making them an attractive choice for individuals looking to optimize their returns. Plus, with the convenience of online banking, you can easily research, compare, and purchase CDs from the comfort of your home.

Credit unions: Credit unions are another great option for buying CDs. These member-owned financial institutions typically offer competitive rates while still providing deposit insurance. Credit unions are federally insured through the National Credit Union Share Insurance Fund, which offers similar coverage as FDIC insurance. This means that your CDs are protected up to $250,000 per depositor, per institution.

Brokerage institutions: If you want to choose from a wide selection of CDs from different institutions, brokerages can be a good choice. These firms act as intermediaries, offering CDs from various banks and credit unions. They also provide access to a CD secondary market, allowing you to buy and sell CDs before their maturity. However, it’s important to note that brokerage institutions may charge fees for their middleman services. So be sure to consider these additional costs when calculating your returns.

When deciding where to buy a CD, always compare the rates, terms, and features offered by different institutions. Consider your financial goals, the amount you plan to invest, and your risk tolerance before making a decision.

By exploring options beyond your local bank, you can potentially lock in higher rates, explore more choices, and enjoy added benefits that better align with your investment objectives.

Types Of CDs

Certificates of deposit come in a variety of flavors. Here are a few of the most popular types to consider:

  • Bump-up: These CDs give you a one-time option to “bump up” your interest rate during the term if rates increase. They are an excellent option if you anticipate rising interest rates but want to lock in a starting rate.
  • Step-up: With these CDs, you lock in an interest rate for a set number of months. Then, at predefined intervals, the rate will “step up” to a pre-determined higher level. For example, a two-year step-up CD might start with a 3% APY and increase by 0.25% every six months until maturity.
  • No penalty (or Liquid CDs): These CDs allow you to withdraw your funds before the maturity date without incurring any penalties. They offer greater flexibility compared to traditional CDs, but they come with lower interest rates as a result.
  • Add-on: With add-on CDs, you can make additional deposits to your CD during its term. This feature can be advantageous if you anticipate investing more money over time. It allows you to gradually increase your investment without opening a new CD each time.
  • Callable: These CDs give the issuing bank the right to recall or “call back” the CD before the maturity date. This means that the bank can return your principal and a pro-rated interest payment, before the agreed-upon term. Callable CDs are a good option during periods of rising interest rates because, even if the bank recalls your CD, you can likely replace it with one offering a better return. Plus, they must offer above-average interest rates in the meantime to compensate for this risk.
  • Uninsured:  These CDs are offered by institutions that are not FDIC-insured or for deposits that exceed the FDIC coverage limit. In exchange for this risk, you will receive a higher interest rate. However, it’s essential to evaluate the financial institution’s reputation and creditworthiness before opening an uninsured CD. Because here, you risk not only losing your interest but your entire investment.

What Is The Minimum Investment For A CD?

The minimum CD investment varies from institution to institution. For example, Capital One and Barclays Bank offer CDs with no minimum deposits. And with Popular Direct, you need at least $10,000 to open a CD.

How To Build The Perfect CD Portfolio: Your Step-By-Step Guide

Are you looking to optimize your savings for maximum returns? Then follow these 6 simple steps to build the perfect CD portfolio, tailored to your personal financial goals.

Step 1: Determine how CDs fit into your portfolio.

If you have short-term goals, such as saving for a vacation or a down payment, consider short-term or no-penalty CDs. They can provide a secure and predictable way to grow your savings while still allowing easy access to your funds if needed.

On the other hand, if you have a longer-term goal like retirement planning, multi-year CDs might play an integral role in your investment strategy. They offer stable and predictable returns that can offset volatility in other parts of your portfolio.

Step 2: Select your CD strategy.

Don’t limit yourself to the ordinary approach of buying just one type of CD. Instead, unlock their full potential by incorporating one of the following strategies in your portfolio.

CD Ladder: This strategy involves staggering your CDs over multiple maturity dates. For example, let’s say you have $10,000. 

You can invest your funds as follows:

1-year CD: $2,500

2-year CD: $2,500

3-year CD: $2,500

4-year CD: $2,500

As each CD matures, reinvest the available funds into another 4-year CD. This way, you build up a portfolio of 4-year CDs with a quarter of your money maturing every year. 

This strategy is perfect if you want to balance liquidity and the higher rates available with longer-term CDs. Or, if you want some flexibility but don’t need full access to your funds anytime soon.

CD Barbell: This strategy involves investing an equal amount between two types of CDs — one with a short-term maturity and the other with a long-term maturity. 

This approach allows you to lock in a higher rate while maintaining access to a portion of your funds. When the short-term CD matures, you can either reinvest it into another short-term CD or replace it with a longer-term CD.

Example: If you have $10,000, you can invest $5,000 into a 6-month CD and $5,000 into a 3-year CD. When the 6-month CD matures, you can reinvest for another 6 months or put the funds into a 2 or 3-year CD.

CD Bullet: If you are saving up for a specific purchase, such as a new car or a down payment, the CD bullet strategy can be an effective way to reach your goal. With this strategy, you build a portfolio of CDs that all mature around the same time.

Suppose you’re saving for a home remodel and your goal is to save $10,000 a year for the next five years. Your bullet strategy would look like this:

Year 1: Invest $10,000 into a 5-year CD

Year 2: Invest $10,000 into a 4-year CD

Year 3: Invest $10,000 into a 3-year CD

Year 4: Invest $10,000 into a 2-year CD

Year 5: Invest $10,000 into a 1-year CD

This strategy allows you to consistently save toward your goal while earning a much better return than sticking your money in a traditional savings account.

Step 3: Shop for the best CD terms.

Once you’ve determined your CD strategy, get your shop on for the best available options. 

Research various financial institutions, comparing interest rates, terms, and any special features they offer. Online comparison tools like Bankrate and Smartasset can be invaluable during this process.

Also, don’t be afraid to mix and match CDs from different institutions when building your portfolio. For example, a bank may offer a great rate on a one-year CD, while a credit union offers a more competitive three-year rate. 

Step 4: Apply for the CD(s).

Applying for CDs is a quick and painless process. Most financial institutions allow you to complete the application in just a few minutes online.

Just provide the basic information, like your personal details and the amount you wish to invest. Then upload a photo ID to confirm your identity.

Step 5: Fund your CD.

Depending on the institution, you can typically fund your CD with an electronic bank transfer or by mailing a check. Shortly after receiving your funds, the institution will issue you a formal document outlining your CD’s term and interest rate.

Step 6: Mark the Maturity Date

After opening a CD, mark the maturity date in your calendar (especially if you have a portfolio with varying maturities). 

We recommend setting a reminder one week before the maturity date.

This will give you enough time to reassess your strategy and decide if you want to reinvest or withdraw your funds. Be sure to act quickly to avoid the unintended consequences of an automatic renewal.

5 Common CD Mistakes

By avoiding these common mistakes, you can optimize your CD investments and maximize the returns of your savings.

  • Forgetting about maturity: Upon maturity, you have a limited window (sometimes just a few days) to make any changes or withdraw your funds. Otherwise, your CD will automatically renew with the same term but at the prevailing interest rate. And this will make your funds inaccessible until the new CD matures.
  • Not accounting for inflation: While CDs offer security, they may not always keep up with inflation rates. Consider the impact of inflation on your returns to ensure your investments maintain their purchasing power over time.
  • Choosing the first option you see: Don’t rush into a CD without researching the market. In just a few minutes, you can compare rates, terms, and features across different institutions. This quick process will help you find the best fit for your financial goals.
  • Failing to consider penalties: If you might need access to your funds before the maturity date, make sure you understand the penalties associated with early withdrawal. Opt for a CD with no penalties or choose a shorter term if you require flexibility.
  • Not matching the CD to your plan: Explore CD options that align with your financial objectives. For example, no-penalty CDs can be beneficial if you might need to withdraw funds early. And add-on CDs allow you to add to your savings without having to open a separate CD each time.

Final Thoughts

Once reserved for pensioners on a budget, CDs have gone mainstream. They are now a popular option among savvy investors seeking safe, yet predictable returns.

And with higher interest rates, CD returns have recently become even more enticing. Now more than ever is a great time to lock in a competitive rate and safeguard your savings.

So now that you know how to invest in CDs, put your newfound knowledge to use! 

Take some time today to review your financial plan and determine which CD strategy best suits your goals. Then start to research the most attractive options on the market.

With a little bit of research and strategic planning, you can make the most of your CD investments. Plus, you will turbo-charge your savings, putting you that much closer to financial independence.

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