At first glance, you wouldn’t think that putting your money in a certificate of deposit, otherwise known as a CD, requires a lot of strategy. True, you do have to figure out how much money you’ll put in the CD, as well as the term of the CD, but once that’s done all you have to do is wait until the CD matures. There’s not much strategy involved, right?
In fact, there are a few strategies you can use when opening CDs. These strategies can help you save for a financial goal, give you a consistently higher rate on your investment, and even help you beat low rates in the stock market. If you’re skeptical, keep reading and find out the true power of CDs
Which CD investing strategy is right for you?
Opening a Single CD
Believe it or not, just opening a CD account qualifies as an investment strategy. Admittedly, it might not be as complex as other strategies, but it still counts.
Think about it: if you’re going to open a CD, you first have to determine how much of your money you’re comfortable putting aside for an extended period of time. Then you’ll have to figure out how long you want your money sitting in a CD, balancing being unable to access your money against getting more money back when the CD matures. All of this involves figuring out how to get the best return from your money.
There are a lot of advantages to opening a single CD. You know exactly how long your money will be in the CD, the interest rate your money will get and the money you’ll get once the CD matures. On the other hand, you also run the risk of losing out on higher interest rates and better returns for your money.
If you’re just starting to invest money, this is a great way to begin. It’s also flexible, and you can invest money that you’re saving for a financial goal, or even part of your emergency fund.
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CD Ladder Strategy
For most people, a CD ladder is the be-all end-all of investment strategies involving CDs. This isn’t exactly true, but what is true is that CD ladders are extremely versatile investment strategies that can accommodate an almost limitless number of CD accounts.
When you build a CD ladder, you open different CDs with different terms. Some CDs will have shorter terms, so your money will be accessible sooner. Other CDs will have longer terms, so you’ll get the best interest rate.
For instance, if you have $4,000, you could create the following CDs, known as “rungs” in this strategy:
- $1,000 in a 6-month CD
- $1,000 in a 1-year CD
- $2,000 in a 2-year CD
When the 6-month CD matures, you can create another CD “rung.” This one might be another 1-year CD that will mature six months after the original 1-year CD matures, so you can ensure that your money will become available twice every year. You could also open another 2-year CD to take advantage of longer interest rates.
This strategy is excellent for money that you don’t plan to spend anytime soon, but still want to be available if you need it. Emergency funds are an obvious candidate for CD ladders, but you can also use this strategy with money you’re putting aside for a long-term financial goal.
Speaking of which…
CD Bullet Strategy
When you use the CD bullet strategy, you’re creating a bunch of CDs that will all mature at the same time. For instance, let’s say you open a CD with a 5-year term. After a year, you have enough money to open another CD, so you open one with a 4-year term. Two years later, you have enough money to open yet another CD, so you open one with a 2-year term. Two years later, all three of your CDs mature, putting a lot of money in your account.
This is a great strategy to use when you’re saving up for a financial goal, especially one when you know the date you want to make the purchase. Some examples of this include:
- Paying for a wedding
- Putting a down payment on a house
- Buying an automobile
The biggest disadvantage with the CD bullet strategy is that you’re not going to get as high a rate of return the closer you get to the date you want to achieve your goal. You’ll also want to make sure the CDs you purchase won’t be automatically renewed by credit union or bank that issued them.
CD Barbell Strategy
If you’re trying to get the best rate for a CD, the barbell investment strategy is for you. This involves purchasing a long-term CD with a high interest rate, and then one or two short-term CDs. These two types of CDs form the two “weights” of the barbell.
When the short-term CDs mature, you can take a look at the rates for both short- and long-term CDs, and invest your money in whichever type of CD has the best interest rate. This is a good way to invest in times of financial uncertainty, when you’re not sure whether rates will rise or fall. However, this type of strategy is less diversified than the standard CD ladder strategy, so you’ll want to be sure that rates are relatively stable when you do decide to invest in a long-term CD.
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Open a CD at First Alliance Credit Union
There’s a lot of ways you can use CDs to create an investment strategy. You can create a CD ladder that will give you regular access to your funds, a bullet strategy that will have several CDs mature at the same time and a barbell strategy that will help you take advantage of a higher CD rate if it comes along. In fact, even opening one CD is an investment strategy in and of itself.
If you’d like to put together your own CD strategy, become a member of First Alliance Credit Union today. If you have $500, you can open a CD. You can then keep an eye on it simply by logging into your online bank account or opening your mobile app.