Definition and Examples of a Barbell CD Strategy

A barbell CD strategy is an investing technique that uses two extremes: long-term CDs with high yields and short-term CDs with low yields. The goal of this strategy is to maximize your yields while preserving flexibility.

Alternate name: CD barbell

For example, a common barbell CD strategy might be to divide your savings between short-term CDs with maturities of less than one year and long-term CDs with maturities of five years or more. The short-term CDs mature quickly (for example, in six or nine months), freeing up cash, while the long-term CDs provide greater yields.

How Does a Barbell CD Strategy Work?

The barbell CD strategy has two ends. The first end, on the low-rate side, consists of short-term CDs that get rolled over regularly. This is great if you want to invest in CDs while still being able to reach short-term goals, fund unexpected expenses, or regularly shop around for higher rates.  The other end consists of less liquid (less accessible) long-term CDs that are not rolled over as regularly. However, they have the potential to earn higher yields. The result of combining the two types of CDs is achieving medium-term yields while preserving some liquidity.

Barbell CD Strategy Example

Suppose you have $25,000 in savings. You plan on using some of it to buy a new car in nine months and the rest for a down payment on a house in five years. After shopping around for rates, you decide to use a barbell CD strategy with Ally Bank. So you split your money between two CDs: 

A nine-month CD with a 0.30% APYA five-year CD with a 0.80% APY

Your average annual percentage yield (APY) is 0.55%. It’s less than you’d earn if you put it all in a five-year CD, but more than you’d earn if you just opened the nine-month option. If you wanted to diversify even more, you could take that $25,000 and split it between several short-term and long-term CDs with Ally:

Three-month CD with a 0.15% APYSix-month CD with a 0.20% APYThree-year CD with a 0.65% APYFive-year CD with a 0.80% APY

Your average APY would drop to 0.45% if you did this, but you’d have even greater flexibility to use your money when you wished. Depending on your goals, this could be a trade-off you’re willing to make.

Whom Is a Barbell CD Strategy Best For?

A barbell CD strategy can be a great option if you:

Have clear short-term and long-term goals you’re trying to reach Want your idle cash to earn more than it could in a savings account or short-term CD but don’t like the idea of locking it all away in a long-term option Are okay with earning a medium yield overall if it means greater flexibility to access your money when you need it

Barbell CD Strategy vs. CD Ladder

Pro and Cons of a Barbell CD Strategy

Pros Explained

Short-term CDs provide great flexibility: One of the biggest benefits of a barbell CD strategy is that some of your money matures more quickly than it would with a medium-term or long-term CD. At maturity, you can use that money to fund goals or look for better CD rates. Long-term CDs give you the potential to earn higher yields: Another benefit of a barbell CD strategy is that the long-term CDs bump up your average yield and help you earn more interest than you would with just a short-term option.

Cons Explained

Locking some money up long-term could be risky: Before you commit to a barbell CD strategy, it’s important to examine your finances to determine how much money you can comfortably lock up long-term.Excludes medium-term CDs: Some banks offer great yields on one-year, two-year, and other medium-term CDs. By excluding these from your investments, you could be missing out on potentially higher yields.Early withdrawal fees: Most CD issuers will charge you an early withdrawal penalty if you pull money out of your CD before it matures.