How to save with CDs as a part of your financial plan

Saving for the future is an important part of any financial plan. A CD can be a safe, conservative way to grow your money with predictable interest earnings over the length of your selected term. Like any asset, CDs have pros and cons. Learning how to save with CDs effectively matters because different strategies can maximize how they help you reach your particular goal. They're not the only building block you want in your financial plan — here's what to know about the role they can play in your strategy.

How do CDs work?

A CD is a bank deposit account, but it's not like checking or savings accounts where you have open access to take out money whenever you want. When you open a CD, you choose the term — or how long your money will stay in it untouched. The lengths usually range from three months to five years, but sometimes longer. For the entire duration, the bank agrees to pay you a fixed interest rate. At the end of the CD term, you'll have the money you originally put in plus all the accumulated interest. You can then decide if you want to renew for another term at a new interest rate or take your money out and put it elsewhere.

Advantages and disadvantages of savings with CDs

Advantages

• Stable, fixed earnings. CDs accumulate steady interest payments at regular intervals.
• Locked-in rates. With investments and certain savings accounts, your potential gains are ruled by the stock market's fluctuations. But the interest rates on CDs don't change for the whole term.
• Variety of options. You decide how long you want your money to be in the CD based on the needs of your timeline.
• Better protection than stocks and bonds. As bank products, CDs have FDIC insurance. That means you're guaranteed not to lose up to $250,000 per depositor, per ownership category at each FDIC-insured bank.

Disadvantages

• Limited liquidity. If you withdraw money before the end of the term or close the account early, you'll have to pay penalties to the bank. Typically, it's several months of interest and potentially additional fees.
• Conservative opportunity cost. While it can be comforting to know your CD holdings are locked into a fixed rate, you can't take advantage of the possibility to earn more if the market has an upswing.
• Overall lower gains than stocks and bonds. On average, CDs will typically earn less per year in the long run than putting the same money into market investments.

CDs can play a valuable role in a financial plan. But given their pros and cons, they shouldn't be your entire portfolio. Placing some of your money in CDs makes sense to give you a factor of stability and to balance out higher-risk, higher-return opportunities.

Different strategies for savings with CDs

When planning how to save with CDs, one challenge is trying to time interest rates. If you put all your money in a long-term CD and rates go up later, you can't take advantage of them. In contrast, if you put everything in a short-term CD and rates fall, you'll be renewing soon at a lower rate.

You also have a tradeoff between return and liquid access to your cash. Longer-term CDs usually pay a higher interest rate but lock up your money for longer. Short-term CDs return your money sooner but typically pay less.

Depending on your goals, consider these strategies for your CDs:

CD ladders

In a CD ladder, you buy a mix of short-, medium- and long-term CDs. For example, you might buy five CDs at one-, two-, three-, four- and five-year terms. When the first one-year CD matures, you might reinvest it in a new five-year CD, so you still have a CD coming up for renewal every year. Or you could cash out as each CD matures and do something else with the money.

CD ladders do the best job of managing interest-rate risk. You are covered for different changes since you're buying across so many timeframes. If rates go up, you have some money coming in soon to reinvest at higher rates. If rates fall later, you'll keep earning the previous high rates locked in with your long-term CDs.

In exchange for these benefits, however, CD ladders can take work to manage year after year.

CD barbells

CD barbells are a little simpler. You split your money over a short-term and a long-term CD. For example, you might split your money 50/50 between a one-year CD and a five-year CD. Each time the CDs mature, you can renew for another term of the same length at the new interest rate or cash it out. This method can provide some liquidity while also locking in the higher rate of the longer-term CD.

CD bullets

CD bullets make sense when you have a specific goal. For example, let's say you want to buy a home in five years. You purchase multiple CDs over time, each with the same maturity date. In the first year, you buy a five-year CD. In the second year, you buy a four-year CD, and so on. This strategy doesn't give you liquid access to your CD funds, but it does allow you to build up interest until your target date.

Is saving with CDs right for you?

A CD may be well suited for several savings goals in situations where you have a long-term savings target and don't anticipate needing the money in the immediate future. For example, if buying a home is a personal goal, a CD could prove more appealing than a traditional savings account for your down payment if it offers a higher annual percentage yield. You might also opt for a CD if you're saving for a big vacation or you already own a home and you plan to tackle some renovations down the line.

A key factor to keep in mind is liquidity. Taking money out of a CD before its maturity date typically results in paying an early withdrawal penalty. For that reason, a regular savings account could be the better choice for an emergency fund or similar savings goals since you can tap into them at a moment's notice.

How to save for retirement with CDs

If you're already contributing to an employer-based retirement plan, you could consider an IRA CD to supplement your savings. IRA CDs observe the same rules as traditional or Roth IRAs with regard to contribution limits and tax benefits. In 2025, you could save up to $7,000 in an IRA CD or $8,000 if you're 50 or older.

Your IRA CD would earn a set interest rate just like any other CD, and IRA CDs are also FDIC-insured for up to $250,000 per person per account type per institution.

This approach may be more appealing for someone who prefers a more conservative approach to saving for retirement. CDs are among the safest ways to grow your money, which can be reassuring if you're concerned about potential losses you could see with other savings options

The bottom line

CDs can be helpful when working toward financial goals, both large and small. Evaluating the savings goals you hope to accomplish, knowing your savings timeframe and knowing the level of growth you'd like to generate can help you determine whether a CD makes sense for your financial goals.

Interested in opening a CD with Citizens? Learn more about our CD rates and options. If you have any questions about CDs or savings accounts, visit our CD FAQs page or stop by your local branch and talk with a dedicated member of our team.