Long-Term vs Short-Term CDs: While longer-term CDs offer higher yields if rates drop, shorter-term CDs currently provide better rates. Consider diversifying with CDs of varying maturities or choose a single term that aligns with your specific financial needs.
What is a CD term and how do CDs work?
The length of time your money stays in a CD is called its term. If you need to take the money out before the term ends, you’ll likely face a fee. However, CDs generally offer higher interest rates than high-yield savings accounts.
However, at each insured institution, deposit insurance will protect up to $250,000 of your funds, regardless of the term length you select. Deposits held at banks are guaranteed by the Federal Deposit Insurance Corp. (FDIC), and deposits held at credit unions are guaranteed by the National Credit Union Administration.
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Short-term CD: what is it?
There isn’t a clear line between short-term and long-term CDs, but most of the time, short-term CDs have terms of up to a year. Most of the time, short-term CDs have lower rates than long-term ones. However, banks have recently raised short-term rates in response to the Federal Reserve’s actions.
As long-term rates rise and economic growth slows, this situation could change. There are higher short-term rates right now that you can use.
Long-term CD: what is it?
A long-term CD typically has a maturity of more than a year, however there isn’t a single industry definition. Certain sources may refer to CD terms ranging from 11 to 23 months as “medium-term CDs,” designating as long term only those that last for two years or longer.
Choosing a longer term enables you to lock in a rate for an extended amount of time, regardless of how you define it.
Long-Term vs Short-Term CDs: Which is Best Before the Next Fed Meeting?
The best rates currently are on short-term CDs. However, long-term CDs might be a better choice in the future if rates go down. You can earn more interest on your money in a CD if you keep it there for a longer time.
When the Federal Reserve raises rates, savings rates tend to go up. When the Fed lowers rates, savings rates tend to go down. Rates have been high lately, but they may go down if inflation slows down and the Federal Reserve lowers rates. People think that the Fed will start lowering rates soon.
If you lock your money into a CD for a longer period now, you can get high rates for a longer time. However, remember that with a CD, your money is stuck until the CD matures. If you need to withdraw the money early, you might face a penalty that could cancel out any interest you’ve earned.
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However, it will pay off if you don’t mind putting aside some cash for a longer-term CD. Before you think about setting aside any money in a CD, we advise creating a sizable emergency fund. A 5-year CD is a wise choice if you can commit to it for an extended period of time; some of the best-performing accounts have annual percentage rates as high as 4%. According to Kiplinger, to Even though the rates on many 1-year CDs are even higher—more than 5%—locking in a slightly lower rate will end up saving you money over time.
You will receive $262.5 in interest if you invest $5,000 in a 1-year CD with a 5.25% interest rate. You’ll have to settle for a much lower rate if you want to open another CD after that one matures. In contrast, if you lock in a five-year CD at a rate of 4.32%, you would keep earning $1,177.43 throughout the course of the five years at that savings rate.
Opening a short-term CD is still worthwhile even if you are unable to commit to a long-term one. Simply put, you won’t be able to benefit from high rates for as long. Still, it will enable you to make a little extra money without having to commit your funds for a long period of time. Although you cannot lock in rates with high-yield savings accounts, it is still worthwhile to open one.
Use our Bankrate-powered tool to compare CDs right now.
How would one pick a CD term?
Short-term CDs are great for saving money for specific goals, like a vacation. For instance, a nine-month CD lets you earn interest while keeping your money safe from early withdrawals.
With current high short-term interest rates, you can earn good returns while meeting your financial needs. However, if the market changes and rates drop, you might miss out on higher returns if you don’t lock in a long-term CD now.
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If inflation decreases and the economy slows, it might be hard to find a 2-year CD with a high yield, like 5%.
““Now is a great time to lock in a CD rate before the Fed begins to cut rates, presumably some time next year in 2024,” stated Christopher Naghibi, First Foundation Bank’s chief operating officer.
Those investors who are risk averse may find long-term CDs particularly appealing. In essence, you could “park it and forget it,” letting your money grow interest-free without needing to be actively monitored.
“People with a low tolerance for market fluctuation would enjoy these CDs,” stated Christopher R. Manske, the founder of Manske Wealth Management.
