6-Month vs. 5-Year CDs: What's the Best Investment Now?
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KEY POINTS
- 6-month CDs offer some of the highest APYs right now, but rates may be lower six months from now.
- 5-year CDs have lower APYs, but locking in today's rates for years may be a smart call.
- High-yield savings accounts have variable APYs, but their rates are high now, and they offer more flexibility.
If you're thinking about locking in a certificate of deposit (CD), you're not alone. Interest rates are still high, but they're expected to drop later this year.
But which term is the smarter move right now: a 6-month CD or a 5-year CD?
Here's a breakdown of the pros and cons of each, as well as a third option you should consider.
How do the rates compare?
- Top 6-month CDs: ~4.50% APY
- Top 5-year CDs: ~4.00% APY
At these rates, a $10,000 deposit would earn a total of $223 in a 6-month CD or $2,167 in a 5-year CD.
Which would earn more over the course of five years, assuming you reinvested in 6-month CDs every time they matured? Nobody can say for sure. However, the Federal Reserve and economic experts alike are predicting interest rate cuts later this year -- and possibly in 2026, too.
In that case, there's a good chance a 5-year CD would earn you more interest overall.
Bear in mind that there's nothing stopping you from investing in both 6-month and 5-year CDs. That could even be a smart way to hedge your bets.
But these two terms have pros and cons that you should think about before committing your money.
The case for 6-month CDs
Pros
- Flexibility: Your money is only tied up for six months, so if rates change (or you need the funds), you're not locked in for years.
- High APY: 6-month CDs currently offer the best CD rates you can find today (with rare exceptions). Very few savings accounts or money market accounts can match these APYs, either -- and their rates can change at any time.
Cons
- Limited compounding: Because the term is short, you won't enjoy as much compound interest.
- Interest rate risk: When your CD matures, rates could be lower -- possibly much lower.
Who should consider 6-month CDs?
6-month CDs are best for savers who:
- Might need their cash within the next six months
- Want more frequent access to their money so they can act on short-term opportunities
- Believe interest rates are more likely to rise in the near term
The case for 5-year CDs
Pros
- Guaranteed APY for years: If interest rates drop soon (as most experts currently predict), you'll be glad you locked in a 4.00% APY.
- Simplicity and peace of mind: For five whole years, your money is safe, FDIC insured, and earning a guaranteed return, and you won't have to think about where to move it every six months.
Cons
- Lower APY than 6-month CDs: Today's top 6-month CDs pay more interest than the best 5-year CDs, which is historically unusual.
- Big early-withdrawal penalties: If you cash out a 5-year CD early, you'll typically sacrifice at least a year's worth of interest.
- Less flexibility: A 5-year term can feel like forever if your financial needs change, or if new investment opportunities arise.
Who should consider 5-year CDs?
5-year CDs are best for people who:
- Have extra cash they won't need for a long time
- Want safety more than the highest possible returns
- Expect interest rates to drop in the near future
Here's a third option to consider
If you're hesitant to lock your money up at all, then a high-yield savings account might be the better choice. Your interest rate can change at any time, but right now the best HYSAs pay an APY of around 4.00% or even more. And you can withdraw and deposit cash whenever you want.
One of my favorite HYSAs is the Barclays Tiered Savings account, which has no monthly fees and pays a 3.90% APY on all balances under $250,000. To earn a 3.90% APY without jumping through hoops, click here to open a Barclays Tiered Savings account today.
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