Is It Better to Have Multiple CDs or One Large CD?

When it comes to investing in certificates of deposit (CDs), the question often arises: is it better to have multiple CDs or one large CD? The answer depends on several factors, including the annual percentage yield (APY) and the amount you’re investing. APYs and minimum opening deposits can vary significantly from one CD to another. Some might offer generous rates on jumbo CDs, which typically require a minimum balance of $100,000 or more, while others might have better APYs with lower minimum deposits.

It’s essential 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. Leveraging multiple CDs with different term lengths, a strategy known as CD laddering, can also be beneficial.

Pros and Cons of Owning Multiple CDs

Pros

• Offers more liquidity: Owning multiple CDs with different maturity periods can provide a predictable stream of returns and liquidity. For instance, if you have three CDs with terms of six months, 12 months, and 18 months, you’ll get your investment back plus interest as each one matures.
• Take advantage of rising interest rates: As the federal funds rate increases, APYs on savings accounts and CDs tend to go up too. Having multiple CDs with different term lengths allows you to free up your money faster and take advantage of rising rates.

Cons

• Can be cumbersome: Managing multiple CDs requires keeping track of each one’s term length and making a plan for what to 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.
• Returns tend to lag behind other investments: While some CDs currently have rates well over 5%, average annual returns for the stock market have been around 10% for the last century. However, stock investing comes with more risk, whereas CDs offer a 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).

To extend your coverage, consider the following strategies:

• 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, such as certain retirement accounts, trusts, and employee benefit plan accounts.

How to Build a CD Ladder

Building a CD ladder involves putting money into multiple CDs with different terms, allowing them to mature on a staggered timeline. Here’s a step-by-step guide to creating a CD ladder:

1. Research CD rates and terms: Look at what different financial institutions have to offer. You might find better APYs at online banks and credit unions.
2. Decide on maturity intervals: Depending on your financial goals, you may want access to some money relatively soon and other funds further down the line.
3. 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 use the funds 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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