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 may 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. Find out if a barbell CD strategy makes sense for you.
What Is a Certificate of Deposit (CD)?
A certificate of deposit 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). Your money earns a specified interest rate 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.
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What Is the Certificate of Deposit (CD) Barbell Strategy?
The longer the term of the CD, the higher the interest rate you’ll typically 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 these two types of 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, which involves buying several CDs that mature at about the same time and the CD ladder strategy, which consists of opening multiple CDs of different term lengths.
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 1.50%
• You invest $5,000 in a 5-year CD earning 5.35%
Your total return would be 3.42% (the average of 1.50% and 5.35%). 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.
With the CD barbell strategy, when your short-term CD expires, you could choose to 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 few 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 typically 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 potential 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).
Using a CD strategy like the CD barbell strategy is one potential way to get higher returns with long-term CDs while still being able to access some of your money by using shorter-term CDs as well. You will, however, 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 want to consider other options, such as a high-yield bank account. Do some investigating to see what savings strategy makes the most sense for you.
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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. Whether the CD barbell strategy makes more money than CD laddering 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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4.20% APY
SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
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