Guide on Investing Through Certificates of Deposit (CDs)
Want to boost your savings with minimal risk? Certificates of Deposit (CDs) could be your ticket! These financial products, issued by FDIC-insured banks or NCUA-insured credit unions, provide a guaranteed return on your investment—with virtually no chance of losing your hard-earned cash.
What exactly is a CD?
A CD is a deposit account that earns a fixed rate of interest over a set period, known as the term. While your cash is tucked away in a CD, it grows through interest accrual and compounding at regular intervals during the term.
CDs are great for setting money aside without needing immediate access. Withdrawing cash prior to maturity may induce an early withdrawal penalty, potentially wiping out interest earnings or even part of your principal.
Plenty of financial institutions offer high yields on their CDs, and you can tailor your investment strategy to your goals. Here's how to get started:
1-year
- Define your CD investing goals (e.g., saving for a home down payment in three years).
- Compare the top CD rates to find the most competitive yields.
- Choose a CD term that matches your timeline and goals.
- Decide how much cash you can comfortably sequester for the term's duration.
- Use our website's CD calculator to forecast your returns.
- Open your CD account and fund your deposit.
$2,000
Curious about short-term savings strategies? Read more about it here.
5.00%
Despite rate cuts, CDs remain a solid choice right now
$2,100
In 2025, the Federal Reserve took a few rate cuts, pushing rates down slightly. However, you can still find CDs with yields that eclipse the 2.4% inflation rate:
- Today's highest-yielding 1-year CDs are offering over 4.00% APY.
- 3-year and 5-year CDs also top out around 4.00% APY.
- Even the best 6-month CD rates sit around 4.20% APY.
2-year
Locking in these competitive yields in longer-term CDs now, before rates drop further, could prove advantageous. Employing a CD laddering strategy allows you to take advantage of today's high rates while maintaining flexibility.
$2,000
Other low-risk investments, such as money market accounts and online savings accounts, might offer better returns and features based on your needs, but a CD still delivers a better return than most traditional savings accounts, which average 0.59% APY nationally.
4.75%
Expert tip: When to lock in CD rates
$2,196
With the Fed projecting continued rate cuts through 2025, it might be a good time to consider locking in today's higher CD rates—especially for longer terms. Remember to pay attention to early withdrawal penalties, though, as these could eat into your returns if you're ever in a pinch for cash.
- Greg McBride, CFA, our website Chief Financial Analyst
3-year
Answering the big question: How much (money) can you make from a CD?
$2,000
Your CD earnings depend on several factors:
4.50%
- The amount you deposit
- The CD's interest rate
- The length of the term
- Whether the interest compounds
$2,281
For example, if you invest $20,000 in a 3-year CD offering a 3.10% APY, over the 3-year term, you'd earn $1,918.26 in interest. Use our website's CD calculator to estimate specific earnings.
Minimum deposit requirements vary by institution, ranging from none (e.g., Capital One) to $1,000 or more (e.g., Bank of America) for certain CD products.
4-year
CD investment strategies
$2,000
Many CD investors follow strategies that involve multiple CD terms to optimize returns while maintaining liquidity. Here are three popular approaches:
4.40%
Laddering
$2,370
CD laddering is the go-to strategy for most CD investors. For instance, if you have $10,000 to invest in CDs, a ladder might look like this:
- $2,000 in a 1-year CD
- $2,000 in a 2-year CD
- $2,000 in a 3-year CD
- $2,000 in a 4-year CD
- $2,000 in a 5-year CD
5-year
When the 1-year CD matures, you reinvest the principal and interest earned in a new 5-year CD. When the 2-year CD matures, you reinvest the funds into another new 5-year CD, and so on. This setup allows for periodic access to funds upon maturity while optimizing earnings on higher-interest CDs.
$2,000
Note that this is only an example; you can split your funds however suits your needs to maximize earnings.
4.30%
| CD Term | Amount | APY | Value at maturity ||---------|---------|-----|-------------------|| 1-year | $2,000 | 5.00% | $2,100 || 2-year | $2,000 | 4.75% | $2,196 || 3-year | $2,000 | 4.50% | $2,281 || 4-year | $2,000 | 4.40% | $2,370 || 5-year | $2,000 | 4.30% | $2,464 |
$2,464
Barbell strategy
Unlike a ladder, which has multiple steps with equal space between them, a barbell skips those middle rungs and concentrates on short-term and long-term CD investments. For example, a barbell might look like this:
- $5,000 in a 6-month CD
- $5,000 in a 5-year CD
By pairing short-term investments with long-term ones, you take advantage of higher rates on the short-term CDs while using the long-term CD as a safety net in case rates drop. This strategy works best in uncertain interest rate environments. If rates rise after your short-term CD matures, you can reinvest at the higher rate. If rates fall, you still have a portion of your funds locked in at the previous higher rate in your long-term CD.
Bullet strategy
2025
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 now, followed by a 4-year CD next year, and a 3-year CD the following year, repeating this pattern until maturity. All your CDs will mature around the same time, making this strategy ideal for investors looking to achieve a specific goal by a certain date.
5-year CD
A benefit of the bullet strategy is that you won't have to invest all your funds at once, opening up the possibility of picking up higher rates along the way on the shorter-term CDs.
$5,000
Different types of CDs
2030
Not all CDs are created equal. :wink: Here's a rundown of some alternatives to traditional CDs:
Bump-up CD
2026
A bump-up CD lets you request a rate boost a certain number of times during the term, as long as rates improve. If rates increase this year, for example, you could ask for your 2-year CD's rate to be bumped up from 4.00% to 4.50% APY. These CDs make sense when rates are expected to rise.
4-year CD
Step-up CD
$5,000
A step-up CD functions similarly to a bump-up CD except the bank automatically increases the rate for you. You'll be aware of the rate increases before you open the CD. For example, a bank's 28-month CD might start with a 4.00% APY and rise by 0.25% every seven months.
2030
No-penalty CD
With a no-penalty CD, you don't have to worry about handing over any earned interest if you need to withdraw cash before maturity. These offer slightly lower rates but provide flexibility. Check out the best no-penalty CD rates here.
2027
Add-on CD
3-year CD
Add-on CDs let you make additional deposits to the principal during the term, much like a standard savings account. Some add-on CDs allow for unlimited additional deposits, while others might limit contributions. The downside is that they may earn less than traditional CDs.
$5,000
Callable CD
2030
Callable CDs give the bank control over closing your CD under certain conditions, such as falling interest rates. For example, if your CD is offering a 4.5% APY, the bank might choose to call (close) it if interest rates drop. These typically come with higher rates as compensation for the risk, but be mindful when investing in callable CDs.
Jumbo CD
2028
Jumbo CDs have a $100,000 (or higher) minimum deposit requirement and may offer slightly higher rates than standard CDs as a reward for the larger investment. Just remember that—thanks to FDIC insurance—even jumbo CDs are protected up to $250,000 per account.
2-year CD
Enrichment Data:
$5,000
A CD laddering strategy offers a structured approach to investing in Certificates of Deposit, balancing liquidity needs with interest rate opportunities. Below is a breakdown of its key advantages and disadvantages:
2030
Advantages of a CD Ladder
2029
Access to Higher Interest Rates
1-year CD
Longer-term CDs typically offer higher interest rates than savings accounts or shorter-term CDs. By laddering, you allocate funds across CDs with varying terms (e.g., 1–5 years), ensuring partial exposure to longer-term rates while maintaining liquidity as shorter CDs mature[1][3][5].
$5,000
Enhanced Liquidity
2030
Regular maturities (e.g., annually) provide periodic access to funds without early withdrawal penalties. This structure allows reinvestment into higher-yielding CDs if rates rise, offering flexibility compared to a single long-term CD[1][3][5].
Reduced Reinvestment Risk
Spreading maturities minimizes the risk of locking all funds into a low-rate CD during periods of rising interest rates. As each CD matures, you can reinvest at current market rates[3][4].
FDIC Insurance and Low Risk
CDs are FDIC-insured up to $250,000 per institution, protecting principal from market volatility. This makes them a safer alternative to stocks or bonds[1][3].
Disadvantages of a CD Ladder
Lower Returns Than Riskier Assets
CDs historically yield lower returns than stocks or corporate bonds. In low-rate environments, growth may not outpace inflation, eroding purchasing power[1][4][5].
Liquidity Constraints
While laddering improves liquidity compared to a single CD, funds remain locked until maturity unless you incur penalties (for non-no-penalty CDs). Emergencies may still require sacrificing interest or principal[1][4].
Opportunity Cost
Committing funds to CDs may mean missing out on higher returns from equities or other investments during bull markets. Rate hikes after locking in terms could also leave portions of the ladder underperforming[1][3][5].
Key Considerations for Implementation
A well-structured CD ladder allocates funds equally across terms (e.g., 20% each in 1–5-year CDs) and adjusts reinvestment based on rate trends. For example:
| CD Term | Maturity | Interest Rate | Allocation ||----------|----------|---------------|------------|| 1-Year | Year 1 | 1.25% | 20% || 2-Year | Year 2 | 1.50% | 20% || 3-Year | Year 3 | 1.75% | 20% || 4-Year | Year 4 | 2.00% | 20% || 5-Year | Year 5 | 2.25% | 20% |
Illustrative example; actual rates vary by market conditions[3]
- One strategy to grow your savings with minimal risk is by investing in Certificates of Deposit (CDs).
- To start investing in CDs, first, define your goals for the term and the amount of money you're willing to invest.
- Use a CD calculator to compare the best rates available and forecast your returns based on the chosen term and investment amount.
- Pay attention to potential early withdrawal penalties that could reduce your returns or part of your principal if you decide to withdraw cash before maturity.
- Consider employing a CD laddering strategy to take advantage of high yields while maintaining some liquidity and minimizing risk.
