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Short-Term CD vs. Long-Term CD: Which Is Right for You?

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If you have a bit of cash you'd like to put to work, and you're willing to do so by buying a certificate of deposit (CD) -- congratulations! We like when people put their money to good, profitable use.

Selecting a CD as that return-generating investment, though, is only the first step. You also need to decide on a CD term. Considering short-term vs. long-term CD options depends on your specific needs. It also depends on how long you’re willing to lock up your money. CD terms can last just one month to five years and beyond. The right one for you may not be the one with the best CD rate

Keep reading to learn some basics about CDs to weigh the benefits of a short-term vs. long-term CD. 

What is a short-term CD?

CD terms tend to range from three months to five years, although there are shorter and longer terms on either side of that span. That's why it's a good idea to check out short-term vs. long-term CD options. 

A short-term CD has a term from three to 12 months. Shorter CD terms typically offer a lower interest rate because of the brief time commitment. 

What is a long-term CD?

A long-term CD is on the opposite side of the spectrum from its short-term sibling. Although some issuers have different criteria for what constitutes "long term," the generally accepted term range for this category is four or more years.

How do CDs work?

A CD is a deposit account offered by banks and other financial institutions. CDs have always been a popular savings option because they offer guaranteed returns.

Standard CDs pay out at a fixed annual percentage yield (APY) when they hit maturity -- as long as you keep the money in the account and don't withdraw funds. If you do so, you'll be hit with a costly early withdrawal penalty. Such penalties can sometimes exceed the return you would have earned if you'd kept that money in the account.

Over the years, variations on the traditional CD have hit the market. "Bump-up" and "step-up" CDs offer holders the chance to get a raise in APY if interest rates are going in the right direction. Aside from those features, they're more or less standard CDs.

Several providers offer CDs that carry penalty-free withdrawal options. These usually have lower APYs than classic CDs because of this. 

For the most part, though, investing in a CD is a commitment of funds. In return for keeping your funds locked up, a financial institution typically offers higher APYs than other savings products. These include offerings like a savings account or money market account, which allow for some degree of penalty-free fund transfer and withdrawal.

A CD is considered one of the most secure financial instruments for determined savers. Plus, like other bank accounts, most CDs are fully covered by the government's Federal Deposit Insurance Corporation (FDIC). Up to $250,000 per person, per account, falls under this coverage automatically.

RELATED: What is CD Laddering? See if this is the right strategy for your portfolio.

Why are CD APYs higher than other deposit accounts?

CD APYs are higher because you're making a commitment to deposit your funds and not touch them for a specific time. This lets banks use that money for a predictable amount of time. Early withdrawal penalties are a strong disincentive to take out cash from a CD, so that money tends to stay where it is. In general, the more stable and predictable a set of funds, the higher the price an investor is willing to pay for it.

Following the same principle, the longer a bank can use that money, the more it's willing to pay out. That's why CD APYs tend to rise with the term lengths. Keep that in mind when you're looking at short-term vs. long-term CD accounts.

Here's an illustration of short-term vs. long-term CD rates, with a sampling of fairly typical recent APYs:

Rates as of Aug. 11, 2022
Lender
Account
1 yr. apy
2 yr. apy
3 yr. apy
4 yr. apy
5 yr. apy
Min. deposit
Early Withdrawal Penalty
Next Steps
Logo for Discover High Yield CD
Member, FDIC
2.30%
2.60%
2.70%
2.80%
3.20%
$2,500
Yes
Logo for CIT Bank CD
Member, FDIC
0.30%
0.40%
0.40%
0.50%
0.50%
$1,000
Yes
Logo for Marcus by Goldman Sachs High Yield CD
Member, FDIC
Marcus by Goldman Sachs High Yield CD
2.40%
2.80%
2.90%
3.00%
3.25%
$500
Yes

Short-term vs. long-term CD lengths

Whether a short-term CD or long-term CD is right for you depends on your financial situation. The first thing to determine is how long you're willing to stuff your money away without touching it.

Even if you opt for a CD that offers penalty-free withdrawals, taking out too much money before maturity will negate the gains you stand to make on your investment. So the term length of a short-term vs. long-term CD account should factor into your decision.

Ultimately, no matter what CD you're considering, the term you should choose largely depends on how secure your financial base is outside of the CD investment. If the answer is "very, and for as long as I can see," you've got a good reason to go for the longest term possible. Five years is typically the maximum offered, but some institutions offer CD terms of up to 10 years.

Short-term vs. long-term CD rates

Long-term rates are usually significantly richer than the short-term ones. But this doesn't mean you should automatically choose a longer term. 

If we’re in an environment of slowly rising rates, locking in a long-term CD could mean losing out on increased savings. Other bank products, like a money market account, would help you take advantage of these interest rate hikes. 

TIP

Read CD reviews

If you're looking for more in-depth information on CDs, here are a few we've reviewed:

If you're among the many people who feel that rates will keep rising, but you still want the safety and return a CD can provide, a short-term standard CD is probably your speed. You might also consider a longer-term, step-up, or bump-up CD if the potential improvement in APY is attractive enough.

Those who don't feel rates will go up, or don't think they'll advance to any significant degree, might be more comfortable opening a longer-term CD. Regardless, keep in mind roughly how long you can go without the money that's parked in it.

Finally, for those who will eventually face a need to tap into the funds devoted to a CD, it's likely best to go for one or more quick hits with shorter terms. Take out a six-month CD, for example, and keep rolling it over until the need arises for some or all of that deposit. Often, even the most pressing financial needs can be delayed at least a few weeks if need be. And you can also set up a traditional savings account or a high-yield savings account as an emergency fund so you're prepared for unexpected expenses.

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