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Understanding the CD Barbell Strategy

Certificates of deposit (CDs) are deposit accounts that offer a guaranteed return over a fixed period, ranging from six months to as long as five or ten years. Instead of investing all your money in one CD, you can diversify your investments through different strategies like the CD barbell.

What Is a CD Barbell Strategy?

The CD barbell strategy involves splitting your deposit into two separate CD accounts: one short-term and one long-term. This approach allows you to increase your returns without locking all your money away for an extended period. The two CD accounts represent the “weights” on a barbell, hence the name.

The goal of a CD barbell is to provide the best of both worlds in saving and investing. Generally, longer-term CDs offer a higher annual percentage yield (APY) because you loan your money to the bank for a longer period, resulting in a better rate. However, long-term CDs come with the drawback of locking your money away for a longer period, and you could face penalties for early withdrawal unless you have a no-penalty CD. Additionally, you risk missing out on better interest rates if rates increase before your CD matures.

By putting a portion of your cash into a short-term CD, the barbell CD strategy gives you access to some of your money earlier if needed. Plus, if market interest rates rise, you can reinvest your short-term CD into a higher-interest CD to maximize earnings.

Barbell CD Strategy vs. CD Ladder

Both the CD barbell and CD ladder are investment approaches involving multiple CD accounts, but they differ in the number of accounts used. A CD ladder involves breaking up your money across many CDs with staggered terms, making your money continuously available on an ongoing schedule. In contrast, a barbell CD involves just two CDs, one short-term and one long-term, with no CDs in between. While a CD barbell offers fewer accounts to manage, it may mean missing out on interest earnings on the middle rungs of the ladder.

Pros and Cons of a CD Barbell Strategy

Before trying the CD barbell strategy, consider the following pros and cons:

Pros

• Guaranteed interest: CDs typically offer a fixed interest rate for a fixed term, making account earnings predictable.
• Accessibility: A short-term CD makes some of your money available sooner, reducing the risk of early withdrawal penalties. It also provides flexibility to secure a better interest rate if CD rates increase.
• Deposit insurance: CDs insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) guarantee up to $250,000 per depositor, per account ownership category.

Cons

• Early termination penalties: Withdrawing from your CDs early could result in penalties that equal a portion of the interest earned.
• Earnings limitations: Investing in the stock market could provide a greater return than CDs if you have a long time horizon, such as 10 or 20 years. Consulting a financial advisor can help determine the best way to manage your money.

When Should I Use a Certificate of Deposit (CD) Strategy?

CD investment strategies are ideal when you’re looking for a low-risk place to set aside money you don’t need for emergencies or bills. CD barbells can be particularly beneficial when you have money to put toward both long-term and short-term goals. For example, you might save part of your money for a summer vacation and another part to buy a car when your teen turns 16 in three years. A short-term CD could offer a guaranteed rate of interest on your vacation fund, while a long-term CD could provide a guaranteed rate of interest for your car fund.

Alternatives to a CD Barbell Strategy

Consider these alternative savings strategies besides the CD barbell:

• CD ladder: This ongoing savings strategy involves opening CD accounts that mature on a staggered basis. When CD terms end, you can roll them into new ones, continually reinvesting your money to take advantage of compounding interest, or withdraw your money for other purposes.
• CD target: This strategy involves opening CDs with terms that meet a specific date or target. For example, if you want to buy a home in five years, you could place $15,000 in a five-year CD term. If you save another $5,000 by the end of the year, you could place it into a separate four-year CD.
• High-yield savings accounts: These accounts offer a higher-than-average yield compared to typical savings accounts, and you can deposit or withdraw money regularly. While the APY on high-yield savings accounts can change, they could be a better place to put emergency savings and cash for near-term financial responsibilities.

The Bottom Line

When your savings earn a limited amount per year in a traditional savings account, investing in CDs can make your money work harder for you. Employing a strategy like the CD barbell allows you to take advantage of long-term CD rates while adding a short-term CD to the mix for financial flexibility. Shopping around to compare rates for different CD terms can help you find the right CDs to add to your portfolio.

For any mortgage-related needs, feel free to call O1ne Mortgage at 213-732-3074. We’re here to help you make the best financial decisions for your future.

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