Investing Through Certificates of Deposit (CDs) Explained
Certificates of Deposit, or CDs, are deposit accounts that offer a fixed rate of return over a set period. These financial products are popular for their safety and consistency, providing an attractive alternative to traditional savings accounts.
CDs can be found with competitive yields, even in 2025, with the highest-yielding 1-year CDs earning over 4.00% APY. However, the minimum deposit required to open a CD varies by institution. Some banks have no minimum requirement, while others may require $1,000 or more.
One common CD investing strategy is CD laddering. This strategy involves investing in CDs with varying terms to maintain liquidity and potentially take advantage of higher interest rates. By dividing your investment into multiple CDs with staggered maturities (e.g., 12 months, 24 months, 36 months), one CD matures every year, providing predictable access to funds without penalty.
The advantages of a CD laddering strategy include regular liquidity and flexibility, protection against interest rate changes, higher yields than savings accounts, and low risk. However, it's important to note that CDs have early withdrawal penalties if money is withdrawn before maturity, which can eat into the earnings and possibly the principal of a CD.
Investing in a combination of short-term and long-term CDs can provide flexibility and a safety net in uncertain rate environments. A step-up CD has rate increases predetermined by the bank before the investor opens the CD, while an add-on CD functions like a standard savings account, allowing for additional deposits to the principal.
A no-penalty CD allows for withdrawals before maturity without penalties, but typically offers slightly lower rates. On the other hand, a callable CD gives the bank the power to close out the CD if interest rates drop, and a jumbo CD requires a minimum deposit of $100,000 and may offer slightly higher rates than standard CDs.
CDs are federally insured, offering protection of the principal up to $250,000 per depositor per institution, as long as the funds are kept until maturity. FDIC- or NCUA-insured CDs are issued by FDIC-insured banks or NCUA-insured credit unions.
Greg McBride, CFA, advises considering locking in higher CD rates, especially for longer terms, as the Fed is expected to continue cutting rates through 2025. Other CD investing strategies include the barbell strategy, which focuses on short-term and long-term CD investments, and the bullet strategy, which involves investing a large sum in a single long-term CD.
In summary, a CD laddering strategy balances the benefit of higher returns and partial liquidity with the tradeoff of locking funds and facing potential penalties for early access. It is especially useful for investors who want low risk and steady income while maintaining some flexibility through staggered maturities. As always, it's essential to research and choose the CD strategy that best suits your financial goals and risk tolerance.
Money market accounts and savings accounts can be alternative options for individuals when considering their personal-finance strategies, as these accounts offer less risk and lower yields compared to investing in CDs. In contrast, investing in a CD laddering strategy can provide regular liquidity and flexibility, protection against interest rate changes, and potentially higher yields than these traditional deposit accounts, all while maintaining a low risk.
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