In this article:
- Is It Better to Have Multiple CDs or One Large CD?
- How to Maximize FDIC Insurance With Multiple CDs
- How to Build a CD Ladder
- How Many CDs Is Too Many?
There is no limit to how many certificates of deposit (CDs) you can have. In fact, holding multiple CDs can provide a steady stream of ongoing returns.
CDs offer a low-risk way to invest. After opening and funding the account, your money will earn interest for the duration of the CD's maturity period. That might range anywhere from one month to five years. Withdrawing your funds before the term ends usually triggers an early withdrawal penalty, but CDs can provide a simple way to diversify your investment portfolio.
Is It Better to Have Multiple CDs or One Large CD?
The answer to how many CDs to have depends on the annual percentage yield (APY) you're able to get and the amount you're investing. But APYs and minimum opening deposits vary from one CD to the next. One might offer a generous rate on a jumbo CD, which typically requires a minimum balance of $100,000 or more—or you might find a better APY on a CD that requires much less. Rates can also vary depending on the term length.
It's best to shop around and compare your options to see which CD makes the most sense for you. For example, you might opt for a shorter term if liquidity is an issue. It's possible to leverage multiple CDs that have different term lengths; a strategy known as CD laddering.
Here are some pros and cons of owning multiple CDs:
Pros
- Offers more liquidity: If you own multiple CDs with different maturity periods, you can set them up so that the terms end on a rolling basis. That can provide a predictable stream of returns and liquidity. Let's say you have three CDs, and the terms are six months, 12 months and 18 months. As each one matures, you'll get your investment back—plus interest. You can then reinvest your money or put it toward a financial goal.
- Lets you take advantage of rising interest rates: As the federal funds rate increases, APYs on savings accounts and CDs tend to go up too. If you lock yourself into a CD term and interest rates eventually go up, you'll likely miss out on those increases—unless you have a bump-up or step-up CD. These allow you to increase your interest rate after you've opened the account, though starting APYs tend to be lower than fixed-rate CDs. When you have multiple CDs with different term lengths, you can free up your money faster and take advantage of rising rates.
Cons
- Can be cumbersome: If you own multiple CDs, you'll have to keep track of each one's term length and make a plan for what you'll do with the funds as each CD expires. It takes a hands-on approach since some CDs automatically renew if you don't take action within a certain timeframe. You'll also have to research CD rates and opening deposit requirements so you can compare offers.
- Returns tend to lag behind other investments: While some CDs currently have rates that are well over 5%, average annual returns for the stock market have been around 10% for the last century. But stock investing does come with more risk. Returns are never guaranteed, and you can expect bouts of market volatility. CDs offer a much steadier ride and more predictable returns.
How to Maximize FDIC Insurance With Multiple CDs
CDs are available through financial institutions like banks and credit unions, and funds are insured for up to $250,000 per depositor, per insured bank, per category. CDs provided by banks come with Federal Deposit Insurance Corp. (FDIC) insurance, while most credit unions offer similar coverage through the National Credit Union Administration (NCUA). The $250,000 coverage limit is adequate for most people, but you'll still want to cover all your bases—especially if you have more money on the table.
It's possible to extend your coverage by:
- Having a joint owner on your account.
- Spreading your savings across two or more financial institutions.
- Opening new accounts within different ownership categories at your current bank. That can include certain retirement accounts, trusts, employee benefit plan accounts and more.
How to Build a CD Ladder
Building a CD ladder involves putting money into multiple CDs with different terms. That allows them to mature on a staggered timeline. It's similar to a CD barbell, which is when you divide your money between one short-term CD and another long-term one. Here's a step-by-step look at how to create a CD ladder:
- Research CD rates and terms to see what different financial institutions have to offer: You might find better APYs at online banks and credit unions.
- Decide which maturity intervals work best for you: Depending on your financial goals, you may want access to some money relatively soon and other funds further down the line.
- Open and fund your CDs: Keep track of when each one expires and make a plan for what you'll do with your money at that point. You might choose to renew a CD, reinvest in a new CD or pull your money and use it as you wish.
How Many CDs Is Too Many?
While there's technically no limit on how many CDs you can have, it probably isn't wise to put all your money into this one investment vehicle. Diversification is a key part of creating a healthy financial portfolio. The goal is to strike a balance between low- and high-risk investments across a variety of asset classes. Some riskier investments may generate better returns over the long haul and help you keep pace with inflation. Meanwhile, more stable investments, like CDs, can help offset losses. It's all about finding the right asset allocation.
The Bottom Line
Having multiple CDs can be a great way to diversify your portfolio without sacrificing as much liquidity. Risk is low, and CDs provide steady returns. Just know that owning too many CDs could cut you off from other high-return investments.
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