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3 CD Strategies to Boost Your Savings

From a ladder strategy to a barbell strategy, discover how a Certificate of Deposit can help you save smarter.

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Purchasing a Certificate of Deposit (CD) can be an important step toward meeting your savings goals, but building an entire CD strategy may be even better. A CD strategy is simply a plan for owning multiple CDs with various terms and amounts, developed in a way that will help you meet specific savings objectives.

Three of the most common CD investment strategies include the CD ladder, CD barbell, and CD bullet.

1. CD Ladder Strategy: Creating a Steady Income Stream

The CD ladder strategy is perhaps the most versatile and widely used approach to CD investing. By spreading your funds across multiple CDs with staggered maturity dates, you can create a structure that provides regular access to funds while maintaining competitive interest rates.

In a typical CD ladder, you might divide your funds equally among CDs maturing in 9, 12, 24, 36, and 60 months. As each CD matures, you reinvest it into another CD, maintaining the ladder structure.

The ladder approach offers several advantages:

  • Regular liquidity as CDs mature at predetermined intervals
  • Reduced interest rate risk through diversification across different maturity dates
  • Flexibility to adjust strategy as market conditions and personal needs change

2. CD Barbell Strategy: Balancing Short and Long-Term Maturities

The barbell strategy focuses your funds at two extreme ends of the maturity spectrum. You might place equal portions of your funds in short-term CDs (9 months) and long term CDs (2-5 years), avoiding middle-term maturities.

Benefits of the barbell strategy include:

  • Short-range access to a portion of funds through short-term CDs
  • Opportunity to reinvest short-term portions if rates rise
  • Protection against interest rate volatility through diversification

Keep in mind that the barbell strategy may require more active management than other approaches, and it may potentially sacrifice some of the steady income stream benefits of a ladder approach.

3. CD Bullet Strategy: Targeting Specific Financial Goals

The bullet strategy involves purchasing multiple CDs that mature around the same time, aligning with a specific future financial need. For example, you may buy a 24-month CD this year, a 12- month CD next year, and a 9-month CD the following year. All three will mature around the same time, allowing you to cash in on all the savings and interest. This approach is particularly useful for known future expenses such as college tuition payments or a down payment on a home.

Advantages of the bullet strategy include:

  • Concentrated maturity dates that align with specific financial goals
  • Potentially higher yields compared to keeping funds in savings until needed
  • Simplified management with fewer maturity dates to track

Comparing the 3 Strategies

CD StrategyMaturity TimelinesBenefits
CD LadderStaggered maturity dates, such
as 9-months, 12-months, 24-
months, 36-months		– Regular liquidity
– Lower interest rate risk
CD BarbellDivide CDs between short-term
(9-month or 12-month) and long term
(3-year to 5-year) CDs,
avoid middle-term		– Short-range access to
some funds
– Opportunity to reinvest
based on interest rate
changes
CD BulletMultiple CDs with similar
maturity date, pegged to a future
expected expense		– Concentrated maturity
dates align with specific
financial goal
– Simplified management
with fewer maturity
dates to track

Choosing the Right Strategy

Choosing the right CD strategy depends on several factors. First, your strategy should match your personal financial goals. Ladders work well for regular income, barbells work well for rate speculation, and bullets are ideal for targeted expenses.

The right strategy will also depend on the interest rate environment. In a rising rate environment, shorter-term strategies may be preferable. In falling rate environments, locking in longer-term rates might be advantageous.

Also think about liquidity needs and your risk tolerance. Ladders provide regular access to your funds, barbells offer partial liquidity, and bullets require limited accessible funds until maturity. While CDs are generally low-risk investments, different strategies carry varying degrees of interest rate and reinvestment risk.

Each CD strategy offers distinct benefits and potential drawbacks. Many investors find success by combining elements of different approaches to create a personalized strategy that aligns with their financial goals, risk tolerance, and market outlook. Regularly review and adjust your CD strategy to make sure it continues to serve your evolving financial needs.

Disclaimer: This article is for general information and education only. It should not be considered financial or tax advice.

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