Savvy Investment Hacks: Making the Most of CDs

When interest rates are high, it pays to have money to invest. And if you're willing to lock in an interest rate in exchange for not touching that cash for a given amount of time, you could get guaranteed returns on certificates of deposit (CD) investments. Plus, there are ways to hack these financial products to get the most out of them.

Here are four strategies you may want to consider.

Hack 1: CD ladders

CD laddering is a practice of opening multiple CDs, each with different maturity dates. The goal is to minimize the amount of time that all of that cash is inaccessible, therefore protecting you against the risk of incurring early withdrawal penalties. It also locks you in for specific interest rates, which can be especially useful during a high-rate environment (like now).

For example, let's say you save $10,000 to invest. You could open a 1-year CD (5.20% APY) and stash $2,000 in there. At the same time, you could put $2,000 in a 2-year CD (4.50% APY), the same amount in a 3-year CD (4.30% APY) and a 4-year CD (4.35% APY) and a 5-year CD (4.15% APY). That way, after that first year, you'd have access to at least $2,000 of your initial investment, plus the returns. At the end of the five-year period, you'd have earned $1,379 in interest, assuming you never reinvest the money in the shorter CDs. And you certainly could keep the ladder going should you choose to.

Hack 2: The barbell strategy

This strategy requires you to purchase short- and long-term CDs, but you'd skip over mid-term maturity dates (think: two to three years.) So, each CD length represents the opposite ends of the barbell. As with laddering, you'd have a portion of your funds available relatively quickly, but you'd still get the benefit of locking in the current CD rates for years to come, maximizing your returns. There's a bit more risk since you'd be skipping out on those mid-term investments, but the interest earned could make up for that if you are comfortable with the risk.

For example, if you take $5,000 and put it in a 1-year CD that has a 5.20% APY, and put another $5,000 in a 5-year CD with a 4.15% APY. At the end of a five-year period, you'd have earned about $1,387 in interest. Again, that's assuming that you don't reinvest the initial CD deposit and interest, which would increase your interest earnings.

Hack 3: The target strategy

Here, you'd spread out the timing of your investing and instead opt for the same maturity dates. So it can be easier for those who don't already have a large sum of money to invest in multiple CDs, since you'd have time to put that money away. And it lets you get a solid return on that cash, with a mind to a particular date when you might want to use those funds.

For instance, you could put $2,000 away in a 5-year CD this year. Then, next year you could put the same amount into a 4-year CD, and so on. At the end of the five-year period, you'd have your original investments plus the returns.

There can be some risk here: Your money would be tied up for a long time period, though you could opt not to invest in the next CD if you run into financial issues, like an unexpected medical bill. But what's even more pressing is the potential for rate changes. Right now, rates are high pretty much across the board, which is more favorable for those with lump sums to invest because they can lock in these rates. There's no way to know how rates will change over time, but you could risk earning less on your investments if rates fall the next time you're ready to open a CD. Still, it may make sense for those with specific financial expenses on the horizon, as long as the rates outpace inflation.

Hack 4: No-penalty CDs

One of the big drawbacks to CDs is that you're locking up your money for potentially years, and with most CDs, you'd have to pay a penalty fee to take that money out early. No-penalty CDs remove that problem by letting you withdraw those funds ahead of the maturity date (provided it's been at least six days since account opening), with the full accrued interest amount. Just be aware that you may have to close the full CD if you ever need even a portion of the funds, and these can come with lower rates.

By combining this hack with other strategies, however, you can build your funds with less risk to your own personal financial security.

CDs can be useful banking products. And when you employ the right strategies, you can both minimize risk and maximize the returns, and make them work for you.