We know you probably understand the basics. But we’d be remiss if we didn’t offer you a quick refresher on what CDs are and how they work.
In a nutshell, a CD is a type of deposit account that, depending on the term, usually offers a higher interest rate than a traditional savings account.
With a CD, you choose a CD term, which is how long you are required to keep your money in the account, deposit a certain amount of money, and let the CD earn interest while it matures.
At the end of the term, you can crack it open and take the money out, drop it in another CD with the very same term or into a CD with a different term. Depending on your CD, you could also receive periodic interest payouts during the term of the CD (more on that in a bit).
Does the Annual Percentage Yield on the CDs offered by your current bank seem low? If so, you might be able to find a better rate online.
When you open a CD your bank may have a variety of terms, or maturity dates, to choose from.
And you’ll have several options of what to do with your money when a CD matures. First, be on the lookout for a maturity notice; your bank is required to send one to you via email or mail before your CD matures.
The notice will tell you the maturity date and the rate on your CD if you choose to renew. The choice is yours. You can withdraw the money or roll it over to a different CD. Or if you don’t do anything the default action typically is to renew the CD for the same term.
Look around the web, or your preferred bank, and you’ll come across a range of CD accounts offered at various financial institutions. Each will come with its own features, benefits, terms and rules. It’s always nice to have options, right?
There are a slew of CD types like high-yield CDs, which earn more interest than a traditional CD, and no-penalty CDs, which allow you to withdraw all your funds after a certain point without penalty, both of which Marcus offers (more on those later).
You may have heard of other types of CDs, including:
Of course, there are other CD types out there. Just know this – CDs come in all shapes and sizes. And they can help you reach a range of savings goals.
As we discussed, CDs are not created equal.
A no-penalty CD is a CD that allows you to withdraw your funds before it matures, usually beginning seven days after funding, without penalty. No-penalty CDs still offer a higher rate than you’d find with a traditional savings account.
Why you’d want one depends on your objectives.
Say you have a specific goal and deadline you want to meet. Or you want a high rate – maybe higher than traditional savings accounts. Or if you want to be able to take advantage of a potential rise in interest rates.
What a no-penalty CD would offer in any of those situations above is the ability to access your funds.
Learn more: What is a No-Penalty CD and How Does It Work?
We touched on this briefly, but consider your full financial landscape. How does liquidity fit into it? How diversified is your plan?
When you have excess cash and you’re looking for a way to earn additional interest, then a CD can come in handy.
There are a handful of other reasons why you might consider opening a CD. Want to save for something specific like a vacation home or home renovation? Looking for an FDIC-insured place to park some of your cash while the rest remains invested in the market?
Remember, if you’re willing to save money for a predetermined amount of time without needing access to it, you could receive a much more favorable interest rate with a CD than you would a traditional or online savings account.
Most CDs also come with fixed rates. So once you’ve locked in a rate, you know exactly how much interest you can earn by the end of the term. In other words, you won’t have to worry about rates going up or down.
High-yield CDs and online savings accounts share some similarities. However, there are differences.
Online Savings Accounts
Online Savings Accounts
Many types of CDs have fixed rates – meaning you lock in one rate for the term of the CD. But there are variable rate CDs, too.
Interest rates are variable; your account's interest rate could go up or down.
Check with your bank for rules about making an early withdrawal of your principal; you'll almost certainly have to pay a fee. But depending on where you opened your CD, you might be able to receive interest payments monthly, quarterly, semiannually or annually.
Up to 6 withdrawals or transfers per month, including written checks, but excluding ATM withdrawals, withdrawal requests made through the mail, withdrawals made by telephone (if funds are mailed and not directly disbursed into your account) and in-person transactions.
There's usually a mimimum deposit required for a CD to start earning interest. With Marcus, it's $500.
Typically, there's either a low or no minimum deposit required to open a savings account online.
You want the best CD rate out there that fits your needs, right? Well, here’s a glimpse into how CD rates work.
Deposit your money into a CD with a long term (i.e., 5 years) and it will likely have a higher CD rate than what would be offered on a shorter term, like a 1-year CD. This is because a bank has more flexibility – that is, more things it can do with your money – the longer you leave it deposited. And a bank is typically willing to pay you a better rate for that convenience.
Learn more: What are CD Rates?
Ah, now we’re getting to the good stuff – the information that could help you move the needle on your savings goals.
Now that you understand the different types of CDs, scenarios when you might consider one, and how rates work, let’s break down some common CD strategies.
Let’s start with a CD ladder. On its face, it’s exactly how it sounds. A CD ladder is when you deposit money into a mix of short-, medium-, and long-term CDs, and continue to do so as each CD matures. Each rung on a CD ladder represents a CD with a different maturity date. Say you have $25,000 to build a CD ladder that matures in one-year increments. Your CD ladder could look like this:
As each of the shorter term CDs mature, you take those funds and deposit them into new longer-term CDs.
Many people use a CD ladder strategy to have the option of a steady, periodic cash flow as CDs mature at different dates. When those CD terms end at different dates, you can rollover that cash into new CDs or use the money as you see fit.
So you can either start small (shorter-term, lower-yield CDs) or start big (longer-term, higher-yield CDs). Just know that if you opt for the latter, you could earn a higher rate.
So that covers a few pointers on CD laddering.
Now let’s talk about another CD strategy you might have heard of. Ever heard of the CD barbell strategy?
A barbell is different from a CD ladder. With a barbell strategy, you can spread a single deposit amount evenly between short-term and long-term CDs – there’s no medium-term CDs with this approach.
When those short-term CDs mature, you can deposit that money into long-term CDs. This approach is designed to help you earn a higher interest rate, on average, over time. One reason people opt for a barbell strategy is that it can allow you to take advantage of a higher yield (on the long-term CDs) while being able to maintain liquidity (with short-term CDs).
Here’s a basic example. Say you have 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:
*Annual Percentage Yield (APY): stated APYs are for illustrative purposes only and do not necessarily reflect APYs that are currently available.
At the end of the five years, you will have earned an overall average yield of 2.0% (1.5%+2.5% / 2).
This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.