Using CDs to Level up Your Savings Goals

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This article was provided by our partners at BECU. Take advantage of Whole U discounts with BECU including a $50 bonus deposit when you open a new checking or savings account!

What is a CD?

A CD is a certificate of deposit, a federally insured deposit account that has a fixed interest rate over a fixed amount of time (called “term” in the CD world). You agree to not touch the CD funds for a set period of time, and in return you may receive a higher interest rate than you would receive in a standard savings account. If interest rates change, the CD rate will not change until renewal. CDs are backed (insured) by the government, so they are virtually risk free.

Benefits & Features of a CD

  • CDs are safe and secure. Unlike investing in the stock market with its roller coaster ups and downs, investing in a CD is a safe bet.
  • CDs earn a higher rate of return than a standard savings account in most cases.
  • CDs have fixed rates for fixed terms. That just means you get to decide how much to invest in a CD and how long you’d like to wait to cash it out.
  • CDs have little to no fees, which mean more money for you.

Like the idea of earning more? Start CD Laddering!

Want the higher interest rates that come with longer-term CDs, but don’t want to tie your money up for so long? That’s where CD Laddering comes into play. “Laddering” is a strategy of opening multiple CDs, each with a different length of term. Then, as each CD matures, you reinvest the proceeds in a new CD with a longer term.

Take a look at this example:

Robert puts $10,000 in a 60-month CD. By doing so, he couldn’t take advantage of rising interest rates, and couldn’t access (free of penalty) his money during the 5 years. Robert decided to try laddering: splitting $10,000 into five separate CDs with different maturity dates:

  • $2,000 in a 12-month CD
  • $2,000 in a 24-month CD
  • $2,000 in a 36-month CD
  • $2,000 in a 48-month CD
  • $2,000 in a 60-month CD

Once the 12-month CD matures, Robert takes the principal and interest earned and reinvests it in a new 60-month CD. That new CD matures exactly one year after his original 60-month CD. 

Robert keeps the momentum going, annually reinvesting his matured earnings into new 60-month CDs and earning higher rates. Although each new CD has a 60-month term, because of his initial laddering strategy, he will have access to a maturing CD every single year.

Not only does Robert have annual, penalty-free access to cash, but he’s taking advantage of the higher interest rate (60-month CD rate), thus earning the best bang for his buck. Remember, in general the longer the CD term, the higher the interest rate.

If you’re enrolled in BECU Member Advantage, you can earn even more on your CDs.

Learn more about our CDs and options! You can open a CD in Online Banking, by visiting your local Neighborhood Financial Center or by calling us: (800) 233-2328. 

Your money is what you make of it – make more! Give CD laddering a try.