CD Barbell Strategy vs. CD Ladder: Which is Right for You?

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What Is a 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 10 years. Instead of investing all your money in one CD, you can diversify by investing in multiple CD accounts through strategies like the CD barbell.

A CD barbell strategy involves investing in both a short-term CD and a long-term CD to maximize returns without locking all your money away for an extended period. This approach allows you to benefit from higher interest rates on long-term CDs while maintaining some liquidity with short-term CDs.

Barbell CD Strategy vs. CD Ladder

Both the CD barbell and CD ladder strategies involve opening multiple CD accounts, but they differ in the number of accounts and their terms. A CD ladder involves breaking up your money across several CDs with staggered terms, ensuring continuous availability of funds. In contrast, a CD barbell consists of just two CDs: one short-term and one long-term, offering fewer accounts to manage but potentially missing out on middle-term interest earnings.

Pros and Cons of a CD Barbell Strategy

Pros

• Guaranteed interest: CDs typically offer a fixed interest rate for a fixed term, making earnings predictable.
• Accessibility: A short-term CD provides access to some of your money sooner, reducing the risk of early withdrawal penalties.
• Deposit insurance: CDs insured by the FDIC or NCUA guarantee up to $250,000 per depositor, per account ownership category.

Cons

• Early termination penalties: Withdrawing from CDs early can result in penalties that reduce your earnings.
• Earnings limitations: Investing in the stock market could yield higher returns over a long period compared to CDs.

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

CD investment strategies are ideal for low-risk savings goals. A CD barbell strategy is particularly useful when you have funds for both short-term and long-term goals. For example, you might use a short-term CD for a vacation fund and a long-term CD for a future car purchase.

Alternatives to a CD Barbell Strategy

CD Ladder

A CD ladder involves opening multiple CDs with staggered maturity dates, allowing continuous reinvestment or withdrawal to meet financial goals.

CD Target

The CD target strategy involves opening CDs with terms that align with specific financial goals, such as saving for a home purchase in five years.

High-Yield Savings Accounts

High-yield savings accounts offer higher interest rates than typical savings accounts and allow regular deposits and withdrawals, making them suitable for emergency savings and near-term financial needs.

The Bottom Line

When traditional savings accounts offer limited returns, investing in CDs can make your money work harder. A CD barbell strategy allows you to benefit from long-term CD rates while maintaining some financial flexibility with a short-term CD. For personalized mortgage services, contact O1ne Mortgage at 213-732-3074. We’re here to help you achieve your financial goals.

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