CDs are time-based deposit accounts from banks, credit unions or other financial institutions. With the exception of variable-rate and no-penalty products, CDs can help balance risk in a portfolio because most require you to keep your money deposited for a set period in exchange for fixed-rate earnings.
The pros of investing in a CD include FDIC protection and a guaranteed fixed rate for your cash. Cons include a lack of liquidity and penalties for early withdrawal of your funds.
Marguerita Cheng, founder of Blue Ocean Wealth
CDs can help balance risk in a portfolio because most require you to keep your money deposited for a set period in exchange for fixed-rate earnings. There are some exceptions, such as variable-rate CDs or no-penalty CDs, that have changing rates or don’t require you to leave funds deposited for the CD’s entire term.
Early Withdrawal Penalties
Most CDs come with early withdrawal penalties if you take money out of the account before your CD matures, which is when its term ends. That makes CDs best for people who don’t need liquidity for those funds.
“There are certain situations when paying the penalty may make sense,” Cheng said. “For example, covering medical expenses or home repairs when you may end up carrying a balance on your credit card.”
The threat of an early withdrawal penalty could also be useful for some people who are tempted to spend their money if they have easy access to it.
From a psychological perspective, knowing you would have to pay a penalty to withdraw the money early may make you more disciplined to not touch your money if it’s sitting in a CD vs. other products that do not have a penalty, like your typical savings account.
Renee Stene, financial advisor and founder of Weddington Advisors
Deposit Insurance
If you open a CD with a bank insured by the Federal Deposit Insurance Corp. (FDIC), your deposit is automatically insured at no cost to you for up to $250,000 per depositor, per insured bank and ownership category. This means that if your bank fails, you’ll be covered up to the maximum insurable amount. Credit union CDs, sometimes called share certificates, receive similar protection through insurance from the National Credit Union Administration (NCUA).
How Do I Get the Most Out of My CD?
To maximize your CD earnings, consider the type of CD you need and implement strategies to minimize your potential risk. You may want to use a CD ladder to diversify your maturity dates as interest rates change or a brokered CD to get a broader range of options and potentially higher yields.
Consider Your CD Type
The first way to maximize your CD’s potential is to consider the type you need. Here’s a quick breakdown of how they differ:
| Traditional CD | Bump-Up CD | No-Penalty CD |
|---|---|---|
| Fixed APY for the entire term | Allows you to get a higher rate if the available rate rises during you CD’s term | Doesn’t charge a penalty if you withdraw principal before your CD matures |
| Typically offers higher APYs than traditional savings accounts | Provides flexibility in case rates increase before your CD matures | Allows early withdrawal at no cost |
| Best for those seeking predictable, guaranteed returns | Best for investors who expect rates to increase | Best for those who may need access to their funds before the CD matures |
Implement a CD Ladder Strategy
Creating a CD ladder involves purchasing CDs with varying maturity dates instead of investing in just one CD.
“By staggering the maturity dates, you can take advantage of higher interest rates without giving up access to your cash for an extended period of time,” Cheng said.
Here’s how it typically works: Instead of putting all of your funds into a single CD, you divide your investment into smaller portions to buy separate CDs with different term lengths, such as six, 12 and 18 months. As each CD matures, you can reinvest the money into a new CD, effectively creating a “ladder” where a CD matures at regular intervals.
“A CD ladder can lower interest-rate risk,” Cheng said. “For example, if you put all your funds in one three-year CD, you may miss out on an increase in interest rates that could occur in the next few years while your cash is tied up.”
Look Into Brokered CDs
Brokered CDs are offered by brokerage firms such as Vanguard, Fidelity or Schwab rather than traditional banks or credit unions. You can often get higher CD interest rates through brokerage firms because they negotiate with multiple banks on behalf of their clients.
Brokered CDs also offer flexibility in terms of initial investment amounts and maturity dates, which could make them attractive options for people who want to diversify their portfolios. But because brokered CDs can be sold on the secondary market, unlike bank CDs, they may lose value.
Alternatives to CDs
While CDs are a reliable way to earn money on cash investments, there are several alternatives. This chart compares the key features of CDs, high-yield savings accounts, money market accounts and bonds:
| Features | CDs | High-Yield Savings Accounts | Money Market Accounts | Bonds |
|---|---|---|---|---|
| Type of investments | Time deposit | Savings account | Savings account | Debt security |
| APY | Typically fixed | Variable | Variable | Fixed or variable |
| Timeline | Fixed term | No fixed term | No fixed term | Fixed term |
| Risk | Low | Low | Low to moderate | Moderate to high |
| Ease of Access | Limited access until maturity | Immediate access | Immediate access | Varies |
| Initial Deposit | Varies | Typically low | Typically low | Varies |
| Insured by the FDIC or NCUA | Typically | Typically | Typically | No |
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