How To Invest In CDs (2024)

A certificate of deposit, or CD, lets you invest money with very little risk. You can think of it as a happy medium between putting money in a savings account and putting it in the stock market.

When you buy CDs, you invest your money for a fixed period of time—six months, a year or several years, for example. In exchange for locking up your money for a period of time, you earn a higher interest rate than you would with a typical savings account, and your returns are guaranteed. Depending on your goals, you can use one of several strategies to invest in CDs.

How Does A CD Work?

When you open a CD at a bank or credit union, you agree to a term and a fixed interest rate. This means you know when your deposit will mature and how much interest you’ll earn during that term. If you withdraw your money before your term ends, you’ll likely be hit with early withdrawal fees. But if you leave your money in the CD until its maturity date, you’ll receive the full principal plus interest upon withdrawal.

When your CD matures, you have a grace period—usually 10 days or less—to either withdraw your money or reinvest it. If you don’t withdraw your money within the specified grace period, the bank or credit union will typically automatically reinvest the money.

When you open a CD at a federally insured bank or credit union, your principal and interest are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA), respectively. Because of this insurance, CDs are relatively low-risk investments.

There are several different types of CDs, each with its own terms and features. Some types offer added flexibility like the ability to withdraw money without penalty or the ability to add money at any time, while others earn higher interest rates in exchange for a bigger opening deposit.

Why Invest In CDs

While CDs aren’t the best place for your money in every situation, there are times when their security and relatively high-interest rates can make them a wise investment. For example, a CD may be a good investment if:

• You have a big purchase coming up within a shorter time frame. If you don’t want to risk an investment losing value in the stock market, you could invest in a CD, knowing the principal and earned interest will be there at maturity.
• You have cash you don’t need anytime soon sitting in a savings account. You could probably be earning more in interest by putting that money into a CD, assuming you don’t access it before it matures.
• You have savings you want to get out of sight and out of mind. CDs are a great way to “lock up” your money while earning decent interest. If you have money set aside for a specific long-term goal and you think you’ll be tempted to spend it, a CD can incentivize you to leave it alone.
• Rates are high. If you buy a fixed-rate CD, you can lock in an interest rate for a guaranteed period of time. When rates are high—but it’s likely they’ll drop soon—locking in a high rate through a CD can be a smart move.

How To Buy CDs

Once you decide you want to invest in a CD, buying one is straightforward. Here are the general steps:

1. Decide how a CD fits into your investing strategy. What are you going to use the money for? When do you need to access it again, and how much can you afford to invest?
2. Shop around for a CD with the terms you want. Consider the maturity date, type of CD and interest rate. Keep in mind that your current bank may not offer the best CD rates, though you can always open one somewhere else.
3. Apply for a CD. The application process varies by institution, but you can usually apply online. You’ll need to provide basic personal information and decide when you want to receive interest payments—either in a lump sum when your CD matures or periodically throughout the term.
4. Fund your CD. With most CDs, you only fund them once. Depending on the financial institution, there may be a minimum opening deposit required to fund a CD.

CD Investment Strategies

There are several different strategies you can use when it comes to investing in CDs. Three popular strategies include CD ladders, CD barbells and CD bullets.

CD Ladder

A CD ladder is an investment strategy that involves opening multiple CDs at once and staggering the maturity dates so that funds become available to you periodically. As each CD matures, you can withdraw that money or reinvest it.

For example, a CD ladder could look like this:

CD Barbell

A CD barbell is similar to a CD ladder but without the “middle rungs.” With a CD barbell, you buy two CDs: one short-term and one long-term. When the short-term CD matures, you can either withdraw or reinvest the money, depending on current interest rates and your goals.

Like the CD ladder, you ensure you’ll have some money available in the short term to reinvest or withdraw. This might be wise if you think interest rates will increase in the near future.

Here’s an example:

CD Bullet

A CD bullet is a strategy you might use to save for a big purchase with a specific deadline—for example, buying a house, having a wedding or going on a big vacation.

With this strategy, you buy CDs over several years, each with the same maturity date. When they all mature at the same time, you gain access to the principal and interest from all of the CDs to pay for your big expense.

Here’s an example:

Where Can I Buy CDs?

You can buy CDs at traditional banks, online banks, credit unions and brokerages. Some financial institutions with more limited offerings may not offer CDs.

Whether you buy a CD at a bank or credit union, they generally work the same way—although a CD at a credit union may be referred to as a share certificate, and you may need to become a member of the credit union to open a CD. Brokered CDs, on the other hand, are slightly different as they can be sold before they mature.

Bottom Line

CDs are low-risk investments that can earn more interest than a savings account while providing the security of FDIC or NCUA insurance. You can buy CDs at credit unions, banks or other financial institutions—just make sure the terms and features align with your investing goals before buying them.