3 Tricks I Use to Make CD Investing Work for Me

Certificates of deposit (CDs) have become an attractive option over the past year as interest rates have risen. Usually, you'll earn a higher interest rate in a CD than a regular savings account since you're committing to keeping your money in the bank for a set period.

Also, CD rates are set in stone for the duration of your CD. If you open a 12-month CD at 5%, you're guaranteed that interest rate on your money for the upcoming year. With a savings account, you might start out with a certain interest rate only to see it drop if that's what market conditions call for.

But if you're going to put money into a CD, you need to go about the process strategically. Here are some tactics I use when opening CDs.

1. I make sure I'm only tying up money I don't need

With a CD, you take on a bit of risk in that if you need to cash out early, you're likely to face a penalty. That penalty can vary from one financial institution to another. But at Capital One, for example, the penalty for cashing out a CD early with a term of 12 months or less is three months of interest. 

An early cash-out penalty could end up eating into or wiping out your profits as a CD investor. So one thing I always do is make sure to keep funds I'm earmarking for emergency expenses in a separate account. That way, I'm less likely to face those penalties.

2. I ladder my CDs so they come due at different times

Since CD penalties can be a huge financial bummer, I make sure to ladder my CDs. 

My specific approach to laddering recently has been to open a bunch of 12-month CDs two to three months apart. The reason I've taken this approach is that I've found the rates on 12-month CDs to be the most attractive. But now, I have a portion of my total CD investment coming due every eight to 12 weeks, so I'm less likely to run into a situation where I have to cash out a CD early.

3. I use CDs as part of my overall investing strategy

Right now, I'm earning 5% or more on most of my CDs. That's a nice rate given that I'm not at risk of losing principal, since my deposits fall below the $250,000 FDIC insurance limit and my bank is FDIC-insured.

But CDs represent only part of my portfolio. On top of my CDs, I have a fair amount of assets in stocks, ETFs, and other investments that have the potential to produce even greater returns.

Of course, stocks and similar assets carry the risk of losing principal. On the other hand, having a $10,000 CD at an FDIC-insured bank means my $10,000 is protected. 

But in the long run, I don't want only a 5% return on my money. Call me greedy, but I'm aiming higher. And I should be aiming higher, because over the past 50 years, the stock market has rewarded long-term investors with an average annual 10% return. 

It's also worth noting that I have more money than usual in CDs at present because rates are so competitive. Once they start to fall, I intend to roll my CDs into other assets that are likely to do better for my finances as they come due.

Putting money into CDs is a move that might work out really well for you. But make sure you're not tying up your emergency fund in a CD, and that you're laddering your CDs for more flexibility. Just as importantly, be open to investing in other assets that have the potential to lead to higher returns.