CDs serve as one part of an overall investment portfolio. Because CDs are guaranteed growth, they typically have low interest rates. The longer you keep your money in a CD, the higher the interest rate will be, but the longer the time that you will not have that money to spend. As such, you need to be aware of how you structure your portfolio so as not to incur excessive penalty fees. While it is impossible to predict every twist and turn your finances will go through, a staggered system of CD investments can help you to avoid the pitfalls that are created by unexpected occurrences.
The best way to utilize CDs is to stagger your withdrawals. For example, if you have $100,000 and wish to buy a CD, but you will need a small portion of that money soon, stagger the time periods so that you can withdraw some penalty free. This might take the form of several individual CDs: $20,000 in a five year CD, $20,000 in a two year CD, $30,000 in a one year CD, and $30,000 in a six month CD. This CD staggering strategy will enable you to have a steady stream of money over a long period of time without having to rely on CDs that have not yet expired.
While CDs will not account for the bulk of your investment portfolio, having enough “safe” money is an important part of investing. You need to have some money guaranteed to grow in order to protect yourself from the natural dips in the stock market. Even within your CDs you will want diversity so as to supply you with a steady stream of income.