Short-Term vs. Long-Term CD Terms

A certificate of deposit (CD) account can be used for different savings goals. When opening a CD, it's important to consider what type of term works best. While short-term CDs can offer flexibility, a longer-term CD could yield a higher interest rate.

Key Takeaways

  • A certificate of deposit is a time deposit account that pays interest over a set time frame, until the CD matures.
  • Banks can offer CDs with shorter terms and CDs with longer terms to help meet different savers' needs.
  • Short-term CDs can offer flexibility since they take less time to mature.
  • Choosing longer-term CDs could make sense for saving funds you don't think you'll need to spend right away.

Certificate of Deposit Account Basics

A CD is a type of time deposit savings vehicle. When you put money into a CD, it's under the agreement that you'll leave it there until a certain maturity is reached. This maturity period is the CD term. At the end of the CD term, you can withdraw the initial deposit and interest earned or roll the entire amount into a new CD account.

Banks and credit unions can offer CDs with varying terms. For example, you might be able to open a CD that matures in 28 or 30 days. Or you may have the option of choosing a CD with a five- or 10-year maturity. Withdrawing money prior to maturity may trigger a CD early withdrawal penalty. This penalty can be equal to some or all of the interest earned.

The amount of money you'll need to open a CD can depend on the bank. Some CDs may have initial deposits as low as $100 or $500; others may require you to deposit $5,000 or more. CDs generally do not have monthly maintenance fees the way a savings account or money market account might.

When CDs are held at member banks, they're protected by Federal Deposit Insurance Corporation (FDIC) insurance coverage. Credit unions can insure CDs through the National Credit Union Administration (NCUA). In either case, your CDs would be insured up to $250,000 per depositor, per account ownership type, per financial institution in the event that your bank or credit union fails.

Important

There's no limit on the number of CDs you can open but holding multiple CDs at the same bank or credit union could exhaust your FDIC or NCUA coverage limits.

Short-Term CDs

A short-term CD is a certificate of deposit that has a maturity term of less than one year. Banks can offer short-term CDs with varying maturity terms. For example, your bank might offer these options for opening a short-term CD:

  • 30-day CDs
  • 3-month CDs
  • 6-month CDs
  • 9-month CDs
  • 12-month CDs

Banks may also offer special short-term CDs with maturity terms that are somewhere between one and 12 months.

The advantage of a short-term CD is that your money isn't locked in for years. You can add money to a short-term CD, then pull it out again within a relatively short time frame. Choosing a short-term CD could make sense if you:

  • Are saving for a short-term goal, like a vacation or new furniture
  • Expect CD rates to rise in the near term
  • Want to avoid early withdrawal penalties

The trade-off, however, is that short-term CD rates are typically lower than what you might get with a longer-term CD. That's because banks often reward savers who choose long-term CDs with higher rates.

Note

CD interest rates can be influenced by movements in the federal funds rate; when this rate goes up or down, CD rates can follow suit.

Long-Term CDs

A long-term CD is generally any CD with a maturity term of one year or longer. Banks and credit unions can offer different types of long-term CDs. Some of the CD terms you might be able to choose from include:

  • 15-month CDs
  • 18-month CDs
  • 24-month CDs
  • 36-month CDs
  • 48-month CDs
  • 60-month CDs

It's also possible to find CDs with even longer terms. Choosing a CD term of one year or longer usually means being certain that you won't need to withdraw the money any sooner. Otherwise, you might face an early withdrawal fee.

Longer-term CDs may be useful if you:

  • Have a fully-funded emergency fund for short-term financial needs
  • Don't expect CD interest rates to rise any time soon
  • Want a safe, secure place to keep your savings until you need

Compared to short-term CDs, you may get better rates from long-term CDs. Again, banks can use higher rates as an incentive to get savers to choose longer CD terms. So instead of earning 0.50%, for example, you might earn 2.00% on your CD instead.

Tip

Online banks may offer higher rates for short-term and long-term CDs versus traditional banks.

Short-Term vs. Long-Term CDs: Which Is Better?

Whether it's better to choose a short-term or long-term CD can depend on your financial needs and goals. Short-term CDs are designed to hold money temporarily until you plan to spend it. So you might use a CD to hold sinking funds for planned annual expenses, like car repairs or insurance premiums, for example. You know your money is somewhere safe and you can earn interest while you're at it.

The key is choosing the right maturity term. Otherwise, you may get hit with an early withdrawal penalty if you need to pull money out sooner than expected.

With long-term CDs, getting the timing right is more important for interest earnings. If you think rates might go up in the next 12 months, then it might not make sense to lock up all your money in a five-year CD. The only exception would be if it's a CD that allows you to raise your rate at some point during the maturity term.

Opening a mix of short- and long-term CDs using a CD ladder can help you avoid early withdrawal fees and missed opportunities with interest rates. When you ladder CDs, you open multiple CDs with different maturity terms and rates. As each CD on the ladder matures, you can decide whether to roll it over to a new CD or withdraw the money.

Is a CD Short-Term or Long-Term?

A CD can be short-term or long-term, depending on its maturity term. A short-term CD typically has a maturity term of less than one year while a long-term CD usually has a term of one year or more.

What Is the Best Term for a CD?

The best term for a CD is the one that will offer you the highest interest rate within a time frame that matches your financial goals. Withdrawing money from a CD before it matures can result in an early withdrawal penalty.

What Makes More Money, a Short-Term CD or a Long-Term CD?

Whether a short-term or long-term CD makes more money depends on the interest rate and annual percentage yield (APY). Generally, CDs with longer terms tend to offer higher interest rates and APYs to savers, though banks may offer special promotional CDs with higher rates and shorter terms.

The Bottom Line

When choosing CDs, it's important to consider the maturity term and how well that matches up with what you need. It's also good to shop around to find the best CD rates for the maturity term that you're seeking. Doing your research beforehand can help you find the right CD option.

Article Sources

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  1. Consumer Financial Protection Bureau. "What Is a Certificate of Deposit (CD)?"

  2. HelpWithMyBank.gov. "What Are the Penalties for Withdrawing Money From a CD Early?"

  3. National Credit Union Administration. "Share Insurance Fund Overview."

  4. Federal Deposit Insurance Corporation. "Deposit Insurance FAQs."

  5. FINRA. "Certificates of Deposit."