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CD Strategies to Get the Most From Your Savings

June 11, 2014
Banking, CDs
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Whether you’re getting ready for a big trip abroad or preparing for retirement, properly managing your CDs will help you reach your personal finance goals even faster. CDs can help you get the most out of your savings if you find terms and interest rates that work for you, manage your portfolio effectively and follow a strategy to meet your goals.

Here are three CD strategies that can help you save even more:

The ladder strategy

If you feel comfortable sustaining a long-term investment, consider starting multiple CDs with staggered terms, then reinvesting the total plus interest from the short-term ones into the longer-term CDs. This is called a CD ladder. For example, if you had $4,000, you might put it in four CDs:

  • $1,000 in a 3-month CD
  • $1,000 in a 6-month CD
  • $1,000 in a 9-month CD
  • $1,000 in a 1-year CD

As each shorter-term CD matures, you would reinvest that money back into a longer-term CD with a higher yield, until eventually one 12-month CD is maturing every three months.

Why it’s a great plan: Building a ladder encourages you to perpetually save and reinvest, while still giving you a certain amount of flexibility by diversifying your CD maturity dates.

What to remember: If you decide to build a CD ladder, it’s a good idea to have a solid emergency fund, so you can maintain your CDs without making a withdrawal.

The bullet strategy

Are you saving up for a big event, like a vacation or a wedding? Consider trying the bullet strategy. With this method, you start CDs at different times, but all of the maturity dates are the same. For example, if you were saving for a big vacation in 2019, you might choose to invest:

  • $2,000 in a 5-year CD
  • $1,500 in a 3-year CD (in 2 years)
  • $1,000 in a 1-year CD (in 4 years)

With this strategy, all of your accounts mature by 2019, when you need them. The benefit of investing this way is that you can take advantage of long-term interest rates and gain access to all of your earnings at the same time.

Why it’s a great plan: For people saving toward a goal, this strategy can help you earn more on your money while also encouraging you to keep your hands off until you actually need the money.

What to remember: If you don’t have a specific savings deadline, the ladder strategy could be a better plan for you.

The barbell strategy

If you’re waiting for interest rates to go up, consider the barbell strategy. With this method, you invest half of your money in short-term CDs and half in add-on variable-rate long-term CDs. Then, you reinvest the short-term CDs into the long-term CD after they matured. For example, you could invest:

  • $3,000 in a 3-month CD
  • $3,000 in a 5-year CD

When the 3-month CD matures, you can invest it back into the 5-year CD for a higher yield, or ladder your short-term CD into medium-term CDs with better interest rates. If interest rates rise, doing this could help you see even larger returns by the time your long-term CD matures.

Why it’s a great plan: Having a certain amount of savings in short-term CDs makes your portfolio more liquid and gives you more flexibility, while also letting you take advantage of higher yields and potentially larger interest rates on the long-term CDs.

What to remember: If you need access to your savings in the near future, investing in more short term CDs could be a better idea than buying a long-term CD and risking early withdrawal fees.

Investment planning image via Shutterstock.