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Certificates of deposits (CDs) are low-risk investment options that are relatively easy to understand. You park your cash in the deposit account and agree to hold it there for a specific term ranging from three months to five years or longer. In exchange, you may earn a yield up to 10 times higher than a standard savings account with some of the top CDs available.
While these accounts are fairly straightforward, it’s a good idea to explore CD strategies which can help you optimize earnings and maintain some level of liquidity. Rather than locking up all of your money in a single CD, the right strategy could allow you to take advantage of attractive rates while also keeping some of your funds accessible when you need them. This is particularly important to do this March, with inflation on the rise again and cuts to interest rates on hold. Below, we’ll break down three popular CD strategies that may help you meet your financial goals.
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CD account strategies for this March
Here are three timely CD account strategies that can help boost your CD returns this March:
CD laddering strategy
One of the most common concerns with CDs is that your money is locked up for a set period, and you won’t have access to it in an emergency or if better rates become available. After all, withdrawing funds before your CD matures typically leads to an early withdrawal penalty. A CD laddering strategy can help you avoid this by giving you access to funds at regular intervals.
Instead of depositing all of your cash in one CD account, you’d spread your funds across several accounts with different term lengths. For example, if you have $5,000 you’d like to grow toward a five-year savings goal, such as saving for a home down payment, you could deposit $1,000 into five CDs with terms of one, two, three, four and five years, respectively. Then, as each CD matures, you could continue growing your money by reinvesting the principal and interest earned into a new five-year CD. That way, you can access some of your savings each year while still growing your money with higher long-term returns.
“A CD ladder can be a useful strategy to help people grow their savings while taking advantage of today’s best rates,” says Shana Hennigan, chief business officer at Raisin, a savings marketplace. “It’s a balanced approach since it allows you to lock in higher rates for the long-term, while the shorter-term products allow access to your cash in case you need it.”
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CD barbell strategy
A CD barbell is like a mini CD ladder, with only two accounts—like the ends of a barbell. You deposit some of your money into a long-term CD and some into a short-term CD. This strategy allows you to lock in higher long-term rates while working towards upcoming goals with a short-term CD.
“So if you had $2,000 to invest, you’d put $1,000 into a short-term CD, like a 3-month CD, and the remaining $1,000 into a longer-term product, like a 18- or 48-month CD,” says Hennigan. “This may be a good strategy in the current market. If rates do go down as anticipated, half of your investment is locked into one of today’s higher rates.”
But, as with most investments, this strategy does come with some potential reinvestment risk, notes Mike Crossley, vice president of treasury processing at America First Credit Union. “If rates drop significantly, the funds from the short-term CDs may have to be reinvested in much lower rates. The barbell strategy may be best suited for those who expect rates to decline but want to keep some liquidity available.”
CD bullet strategy
So far, we’ve covered CD strategies that stagger maturity dates to provide flexibility and regular access to funds. A CD bullet strategy differs in that you open several CDs with terms that expire around the same time. Once those CDs mature together you get a big payout at once, which can be great if you’re saving for a specific goal or want to reinvest—ideally at higher rates.
“This strategy can be beneficial for savers who anticipate a significant financial need and expect rates to rise again after an initial decline,” Crossley explains. “A bullet strategy works best for those with a well-defined savings goal, such as a planned major expense or investment in a defined period of time.”
The bottom line
The right CD strategy this March might help you earn higher returns while reducing the risk of locking up your money when you need it most. By structuring your CD accounts to fit your needs, you can lessen the chance of facing early withdrawal penalties while still benefiting from competitive interest rates.
Many financial experts, including Derik Ferrar, head of personal deposits at U.S. Bank, recommend consulting with your banker or advisor to discuss your unique circumstances. “Laddering, barbell and bullet CD strategies can serve a purpose by maximizing yields while minimizing the risk of interest rates moving unfavorably,” he says.
“All of these CD concepts are very similar to dollar-cost averaging with stocks, mutual funds, and other investments. By making multiple investments over multiple time horizons, short-term volatility and longer-term uncertainty are smoothed out to prevent extreme outcomes.”
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