Certificates of deposit (CDs) are financial products banks and credit unions offer. Based on a Gainbridge^® study, 71% of persons purchase CDs because they’re relatively low risk, 65% do so because of the fixed interest rate and predictable returns, and 57% do so because of the higher interest rates than traditional savings accounts.

Sound like a promising investment solution for you? In this article, we’ll cover key strategies on how to invest in CDs and share important considerations to help you decide if these accounts are right for you.

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What’s a CD investment & how does it work?

CDs are a type of savings account that often offers a fixed interest rate. Unlike traditional savings accounts, CDs lock your initial deposit (or principal) into place for a set term — typically three months–5 years. During that time, you may not withdraw any funds without incurring withdrawal penalties.

On average, CDs earn between 0.23% and 1.82% interest per year, while standard savings accounts hover around 0.41%. And as an added advantage, the Federal Deposit Insurance Corporation (FDIC) insures CDs up to $250,000.

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3 CD investment strategies

In most cases, savers deposit a lump sum in a CD at a fixed rate for a predetermined term. When the CD matures — meaning it reaches the end of its term — they either take the funds out or put them into a new CD. 

But that’s not the case with everyone. Depending on your financial goals, you may find that one of the following strategies is more suitable.

1. CD Ladder: What is & how it works

A CD ladder involves opening multiple CDs with different terms and maturity dates. This balances access to funds (liquidity) with the potential for higher ernings (yield). 

Long-term CDs tend to have higher interest rates, but regardless of term length, early withdrawals usually come with penalties. That’s why CD ladders can be advantageous — the longer contracts offer better yields, while the shorter ones allow for more frequent, periodic access to your funds as they mature.

Say you have $50,000 that you want to invest in CDs. If you go the ladder route, your investments may look like this:

• $10,000 in a one-year CD
• $10,000 in a two-year CD
• $10,000 in a three-year CD
• $10,000 in a four-year CD
• $10,000 in a five-year CD

As the accounts mature, you can choose to cash out or reinvest. To maintain the “ladder” effect, you may roll each matured CD over into a new five-year term.

What are the benefits of a CD ladder:

Best for balancing access to cash and earning higher yields over time.

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2. CD Barbell: What is & how it works

While a CD ladder staggers your funds across multiple maturity dates, a barbell typically just involves one long and one short-term investment. In practice, this may look like putting half of your $50,000 lump sum into a one-year CD and the other half in a five-year CD.

Once the one-year CD matures, you can reinvest it into another short-term CD to access higher annual percentage yields (APYs). This strategy is particularly beneficial if CD rates are low but analysts expect them to rise soon. 

What are the benefits of a CD barbell:

Best for meeting a specific future goal (like tuition or a house down payment).

3. CD Bullet: What is & how it works

A CD bullet involves investing in multiple CDs over time, each with the same maturity date. Assuming the same $50,000 lump sum, a bullet strategy may look like this:

• Year one: Investing $10,000 in a five-year CD
• Year two: Investing $10,000 in a four-year CD
• Year three: Investing $10,000 in a three-year CD
• Year four: Investing $10,000 in a two-year CD
• Year five: Investing $10,000 in a one-year CD

In year six, all five CDs mature at once, returning the entire $50,000 lump sum plus accumulated interest.

CD bullets can help you save for time-specific goals — such as paying tuition fees or home deposits — by ensuring the full balance matures when you need it.

What are the benefits of a CD bullet:

Best for combining high liquidity (short CDs) with higher yields (long CDs) while staying adaptable to rate changes.

Is a CD a good investment? Pros and cons

Below are three general upsides and downsides to CDs.

Pros of investing in CDs

Investors often cite predictability, a low barrier to entry, and risk mitigation as the main benefits of CDs:

• Predictable, hands-off investing: CDs usually grow at a fixed rate regardless of what’s going on in the market.
• Low barrier to entry: While you need a reasonably sized deposit to generate notable earnings, you can open a CD with as little as $500. Some institutions even allow a $0 minimum deposit.
• Reduced risk: Because many CDs offer a fixed interest rate, they’re inherently less risky than accounts closely tied to the market. Plus, deposits up to $250,000 are insured by the FDIC even if the issuing bank fails.

Cons of investing in CDs

On the other hand, investors report less access to funds, reduced growth potential, and limited inflation protection as the downsides of CDs:

• Limited liquidity: If you need immediate access to your principal, you’ll likely face a penalty for early withdrawal. Fees vary, but they’re often based on the interest you would’ve earned if you’d kept the money in the account to maturity. Say you withdraw mid-term from a $10,000 one-year CD at 2% APY. The bank may charge a penalty equal to three months of interest — about $50.
• Reduced growth potential: While many CDs’ fixed rates protect you from market downturns, they also prevent you from accessing strong market gains.
• Limited inflation protection: Inflation reduces purchasing power by about 3% annually. Some CDs outperform inflation, but many don’t. It’s for this reason that many prefer annuities. Like CDs, annuities offer fixed income — just with better, more inflation-resistant interest rates.

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Alternatives to CDs

Here are a few alternatives to CDs so you can make a well-informed decision before investing: 

• High-yield savings accounts are FDIC-insured deposit accounts that offer higher interest than normal savings accounts. Compared to CDs, they provide greater liquidity since you can access your funds anytime. 
• Money market accounts are interest-bearing accounts offered by banks and credit unions that often include limited check-writing abilities and require higher minimum balances. While you have immediate access to funds, CDs usually yield higher fixed returns when held to maturity. 
• Bonds are debt securities issued by governments or corporations that pay periodic interest and return your principal at maturity. Unlike CDs — which offer a guaranteed, FDIC-insured rate — bonds are subject to market performance. 
• Annuities are financial products designed to provide a steady income stream, often for retirement, in exchange for a lump sum or series of payments. While both annuities and CDs require you to lock in your funds, annuities typically offer more flexible withdrawal options and the potential for higher earnings.

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Considerations before investing in CDs

Before you choose one CD over another, ask yourself the following questions.

What type of CD is most suitable for me? 

Traditional CDs are the most common, offering a fixed interest rate, a set term, and a penalty if you withdraw funds before maturity. But traditional CDs don’t fit the needs of all savers — others prefer bump-up, jumbo, no-penalty, or variable options:

• Bump-up CDs let you request a higher APY if rates rise during the CD’s term.
• Jumbo CDs require a larger minimum deposit — usually $100,000 or more — and often offer higher interest rates.
• No-penalty CDs let you withdraw funds before maturity without incurring fees, though they may offer lower interest rates.
• Variable CDs’ interest rate changes periodically based on market benchmarks.

How will inflation impact my earnings? 

Over the past 100 years, the U.S. has experienced an average inflation rate of 3.3%. With an average APY of between 0.23% and 1.82%, CD funds will lose purchasing power over time. And the longer the term, the more inflation will affect this investment. 

Are the CD’s terms aligned with my goals? 

Like most investments, CD terms vary depending on your provider, so review the conditions carefully before choosing one. Here are a few things to consider:

• CD type
• Contract length
• Interest rate
• Minimum deposit requirements
• Early withdrawal penalty clauses
• Compounding frequency

These features may all interact with each other, too. For example, no-penalty CDs eliminate fees entirely but usually offer lower interest rates than traditional CDs. 

How soon will I need my funds? 

Try to anticipate any reasons you may need immediate access to your money, and tailor your CDs accordingly. This could mean using a specific CD investment strategy or choosing an account without early withdrawal penalties.

Pro tip: Build an emergency fund to avoid these fees — ideally, one equivalent to 3–6 months’ worth of expenses. Keep this money somewhere accessible, like a high-yield savings account.

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FAQs

How does a CD account work?

CDs are similar to a traditional savings account, but they offer slightly higher earnings. You’ll look for a bank that offers the interest rates and terms that suit your needs, then apply. Once the bank accepts, you’ll choose how you want to receive interest payments, then deposit a lump sum. These funds sit in the bank until the account matures, at which time you’ll get your principal and earnings back.

Are CDs safe investments?

Yes, CDs are often considered safe investments. The FDIC insures them for up to $250,000, so even if your financial institution goes bankrupt, your funds are safe. And many CDs have minimal market exposure, so they grow at a predictable rate.

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This communication is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.