A Quick Guide to CD Barbells

What we’ll cover:

• CDs can be a great way to boost savings.
• A CD barbell strategy can help you earn a higher interest rate while providing flexibility when you need to access your funds.
• The flexibility can be helpful to savers with clear short-term and long-term savings goals.

You may have heard of a CD ladder as a savings strategy. But what about CD barbells? Similar to a CD ladder strategy, a CD barbell involves splitting a pool of money and putting the funds into short-term and long-term CDs. 

The goal here is to earn a higher average yield than you would have if you had simply put that money into a traditional savings account or short-term CDs. At the same time, the barbell strategy offers flexibility for you to access a portion of your savings once the short-term CDs mature.

Let's take a closer look at how this strategy works.

First, a quick refresher: What's a CD?

“CD” stands for certificate of deposit. It is a type of savings product offered by banks, credit unions and some brokerage firms. When you open a CD, you agree to deposit a specific sum of money and leave it untouched for a certain amount of time. 

In exchange for this, your bank or financial institution promises to pay you interest, typically expressed as an annual percentage yield or APY, on that balance, until the CD matures. Generally, the interest rate on a CD is higher than the rate you’d get from a traditional savings account. 

If you were to withdraw the deposit before your CD reaches maturity, you usually would have to pay a penalty for the early withdrawal. That said, there are no-penalty CDs out there that give you a little more flexibility when it comes to withdrawing your money before maturity.

CDs can come with a variety of terms and interest rates (fixed vs. variable). To keep things simple for the purposes of this article, we’ll be referring to traditional CDs, which come with a fixed interest rate. 

The benefits of a barbell strategy

If you have extra cash sitting around or languishing in a low-interest savings account, you might want to consider deploying a CD barbell strategy. This strategy can help you earn a higher interest rate (on average) over time, while still giving you some flexibility to access your savings in the near term.

With a barbell strategy, you put half of your money into short-term CDs and the other half in long-term CDs. The short-term CDs make up one end of your barbell, and the long-term CDs form the other end. Together, the short-end and long-end of your barbell is designed to help you achieve a higher average yield over time than a traditional savings account.

Here’s a basic example. Say you’re looking to deposit $10,000 in CDs. Using a barbell strategy, you would put $5,000 into a short-term CD and $5,000 into a long-term CD with the following terms and rates (note: stated APYs are for illustrative purposes only and do not necessarily reflect APYs that are currently available).

• Short-term: 6-month CD with 1.5% APY
• Long-term: 5-year CD with 2.5% APY

At the end of the five years, you will have earned an overall average yield of 2.0% (1.5% + 2.5% / 2).  

Here are two benefits of this barbell strategy. The short-term CD gives you some flexibility if you need to access some of your savings in six months. But in the interim, you could typically earn a higher interest rate than you would have if you had simply put that money into a traditional savings account (for reference, see the FDIC's national rates for deposit products here). 

At the same time, the long-term CD in your barbell would allow you to take advantage of the higher rate of 2.5% APY. (CDs with longer terms usually come with higher rates.) 

Now let’s say that instead of using a CD barbell strategy, you decided to put your entire $10,000 in to a 5-year CD (2.5% APY). While you can earn more in interest at the end of five years, your entire $10,000 is locked up during those five years. And unless you’re willing to pay a penalty, there’s little flexibility to access that cash if you need it before the CD matures in five years.

Here’s a breakdown of the example to give you a better idea:

*Annual percentage yield (APY): Stated APYs are for illustrative purposes only and do not necessarily reflect APYs that are currently available.