With the CD barbell strategy, you invest in short-term and long-term certificates of deposit, and don’t invest any of your money in medium-term CDs — a strategy that can help maximize income and minimize risk.
CDs have different terms, and generally the longer the term, the higher the interest rate. When you invest money in a longer-term CD, you can take advantage of their higher rates. The downside with a long-term CD is that your money is tied up for a longer period of time. You have more liquidity with a short-term CD, but you will typically earn a lower return.
By splitting your money between short-term and long-term CDs, the idea is to capture the best of both worlds. Here’s how a barbell CD strategy works, and whether it makes sense for you.
What Is a Certificate of Deposit (CD)?
A certificate of deposit, or CD is a time deposit account that offers a guaranteed return that’s typically higher than a savings or money market account.
With a CD, you invest a lump sum upfront (called the principal). The bank promises a specified interest rate that you’ll earn for a specific period of time (known as the term). Most CDs are insured against loss by the FDIC (Federal Deposit Insurance Corporation) or the NCUA (National Credit Union Association) for up to $250,000. Certificates of deposit are considered a type of cash equivalent.
CDs typically pay a higher rate than standard deposit accounts because the account holder agrees not to withdraw the funds until the CD matures. If you deposit $5,000 in a 5-year CD, you cannot withdraw the $5,000 (or the interest that you’ve earned) without incurring an early withdrawal penalty until the end of the five years.
If you do need access to your money before the end of the term, you might consider a certificate of deposit loan, where the bank gives you a loan with the money in the CD serving as collateral.
What Is the Certificate of Deposit (CD) Barbell Strategy?
The longer the term of the CD, the higher the interest rate you’ll earn, but the longer your money will be tied up. The CD barbell strategy is one way that you can attempt to get the benefits of both long- and short-term CDs. By dividing your money between long-term and short-term CDs, you will blend the higher interest rates from long-term CDs with the accessibility of short-term certificates of deposit.
In addition to the CD barbell strategy, there are a variety of different strategies for investing in CDs, including the bullet strategy and the CD ladder strategy. So if you’re wondering where to store short term savings, you have several different options to choose from.
Real Life Example of the CD Barbell Strategy
If you want to start investing in CDs and are interested in learning more about the CD barbell strategy, here is one example of how it could work. Say you have $10,000 that you want to invest using the CD barbell strategy.
• You invest $5,000 in a 3-month CD earning 0.50%
• You invest $5,000 in a 5-year CD earning 2.50%
Your total return would be 1.50% (the average of 0.5% and 2.5%). That’s less than you would get if you put all of your money in a long-term CD, but more than if you put it all in a short-term CD. Depending on your financial goals, you can adjust the terms of your CDs and the amount you put in each half of the barbell.
Typically with the CD barbell strategy, when your short-term CD expires, you’ll take the proceeds and reinvest it in a new short-term CD.
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Benefits of the CD Barbell Strategy
Here are a few of the benefits of the CD barbell strategy:
Higher Returns Than Investing Only in Short-Term CDs
Because half of your money is invested in long-term CDs that pay a higher return, you’ll get a higher return than if you invested only in short-term CDs. This can make it a viable investment strategy if you need access to some of your money but also want higher returns.
More Liquidity Than Investing Only in Long-Term CDs
Another benefit of the CD barbell strategy is that you have easier access to your money than if you invested only in long-term CDs. Half of your money is in short-term CDs, which means that if you need access to your money after a couple of months, you can withdraw the money in your short-term CD when it matures without penalty.
Drawbacks of the CD Barbell Strategy
Here are a few of the drawbacks of the CD barbell strategy:
Excludes Medium-Term CDs
The barbell CD strategy focuses solely on short-term and long-term CDs, excluding medium-term CDs. Depending on your financial situation, you might find it worthwhile to include medium-term CDs as part of your investment strategy.
Ties Up Some of Your Money
When you invest in a long-term CD that won’t mature for several years, you won’t have penalty-free access to that money until the end of the CD’s term. While long-term CDs do usually come with higher returns than CDs with shorter terms, you need to make sure that you won’t have a need for that money until the CD matures.
Barbell CD Strategy vs CD Laddering
| Barbell CD Strategy | CD Laddering |
|---|---|
| Includes only short-term and long-term CDs | Uses short-term, medium-term, and long-term CDs |
| Insured by the FDIC or NCUA up to $250,000 | Insured by the FDIC or NCUA up to $250,000 |
| You’ll have access to some of your money each time your short-term CD expires | Access to your money varies depending on the terms of the CDs you ladder with |
When Should I Use a Certificate of Deposit Strategy?
If you decide you need a long-term savings account, you might want to consider a certificate of deposit strategy like the CD barbell strategy.
CDs with different terms come with different interest rates, so there can be advantages to splitting up your money. Rather than putting all of your savings into one CD, you can distribute your money to a few different CDs as a way to diversify your risk and reward.
The Takeaway
CDs come with different lengths or terms, and the longer the term, usually the higher the interest rate that you’ll earn. A CD barbell might make sense if you want the benefit of having some of your money in a higher-interest CD, while keeping the rest of it more liquid (although at a lower rate) — hence the barbell analogy.
Using a CD strategy like the CD barbell strategy is one way to capture some of the higher returns with long-term CDs while still being able to access some of your money by using shorter-term CDs as well. You’ll also have your money tied up for a longer period of time, so there is a tradeoff that you’ll need to consider.
If you’re looking for better interest rates for your cash while maintaining easy access to your money, you might consider a SoFi high-yield bank account. Eligible account holders can earn a competitive APY if you sign up for direct deposit. Also, SoFi doesn’t charge account fees or management fees.
FAQ
Why is it called a barbell strategy?
The CD barbell strategy is so named because you are investing in CDs at either end of the spectrum of possible terms, with nothing in the middle. This is similar to the shape of a barbell that has weights on either end but nothing in the middle.
Does the CD barbell strategy make more money than CD laddering?
With CD laddering, you usually invest an equal amount of your money in CDs that mature each year. Which strategy makes more money will depend on exactly how you divide your money into different CD terms, as well as how interest rates change over the life of your CD strategy.
Does the CD barbell strategy make more money than the bullet CD strategy?
The bullet CD strategy is an investment strategy where you buy CDs that all mature at the same date. Which of these two CD strategies makes more money will depend on a couple of factors. The first is how interest rates change over time, and the second is exactly how you divide up your investments.
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