Definition and Examples of a Bullet CD Strategy
A bullet CD strategy involves buying several certificates of deposit that will mature at roughly the same time. You’d typically buy these CDs over the course of several years, but you structure them so that all your money becomes available at the same time. It would be a bullet CD strategy if you bought a three-year CD one year, a two-year CD the next year, and a one-year CD the next year.
How Does a Bullet CD Strategy Work?
The main goal of a bullet CD strategy is to make sure all your CDs mature around the same time. It’s a good strategy for anyone saving for a big long-term goal, such as buying a home, doing a big renovation, funding their kid’s college, or saving for retirement. Suppose you’re saving for a down payment on a house. Your goal is to save $10,000 a year for the next five years, so you decide to use a bullet CD strategy that looks like this:
Year 1: You put $10,000 in a five-year CD. Year 2: You put $10,000 in a four-year CD. Year 3: You put $10,000 in a three-year CD. Year 4: You put $10,000 in a two-year CD. Year 5: You put $10,000 in a one-year CD.
Your CDs mature around the same time after five years, even though you bought them over the course of several years. This is a bullet CD strategy in action.
Bullet CD Strategy vs. Barbell CD Strategy vs. CD Ladder
There are two other popular CD strategies you can use if the bullet CD strategy isn’t right for you: a barbell CD strategy and a CD ladder. The following table highlights the differences.
Pros and Cons of a Bullet CD Strategy
Pros Explained
You don’t have to save all your money at once: Most people gradually save up for big purchases over time. This works perfectly with a bullet CD strategy because you can slowly lock away your money as you save your next big chunk.It ensures you have the cash when you need it most: You’re guaranteeing that money will be available when it’s time to make the purchase by choosing a maturity date that aligns with your big expense.
Cons Explained
All CDs mature at once: The biggest downside of a bullet CD strategy is that access to your money is more limited than it would be with a CD ladder or a barbell CD strategy. Everything becomes available at the same time. You’ll have to stay on top of maturity dates: A lot of CDs automatically renew after a 10-day grace period. You’re relocked into another CD with the same exact term if you don’t get your money out within that time frame.
Always review your finances before opening a CD to make sure you can comfortably lock up your savings until the term expires. You could face early withdrawal penalties otherwise.
