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Short-Term vs. Long-Term CDs: Which is Better for You?

Choosing the right type of CD could make a big difference in your potential earnings. 

Advertiser Disclosure: Most products in our articles are from partners who may provide us with compensation. However, opinions expressed here are author's alone, not those of any bank, credit card issuer, airline or hotel chain.

A certificate of deposit (CD) could be a smart way to earn extra money on the cash you keep in savings. Yet before you decide to tuck away your hard-earned money in a CD, it’s important to figure out which type of account makes the most sense for your financial situation. 

There are many options to choose from where CDs are concerned. Your choices start with two broad categories—short-term and long-term CDs. 

The guide below provides an overview of these two types of CDs and how they work. Read on to learn about the pros and cons of short-term and long-term CDs. You’ll also find helpful tips that you can use to figure out which type of account is the best place to store your cash for the foreseeable future. 

What Is a Certificate of Deposit (CD)?

piggy bank and hourglass
iStock

Before we compare short-term vs. long-term CDs, it’s wise to understand how certificates of deposit work. A certificate of deposit is a special type of savings account that holds a specific amount of money for a preset period. 

You might, for example, decide to open a five-year CD and deposit $10,000 cash into the account. Alternatively, you might open a one-year CD and deposit a larger or smaller amount into the account instead. CD terms may vary from a few months to 10 years or longer, and some financial institutions may require you to make a minimum deposit to open a new account. 

When your CD reaches its “maturity date,” the bank or credit union must pay you a previously agreed-upon amount of interest in exchange for leaving your funds parked in the account for the agreed-upon period. If you decide to withdraw the funds from your CD early, you could face early withdrawal penalties, and those fees could offset or even negate your earnings.   

CDs are available from many different banks and credit unions. (Note: Credit unions often call CDs share certificates.) These low-risk investment options often give you the chance to earn more interest on your savings than a traditional savings account, and perhaps even more than a high-yield savings account or money market account as well. 

However, the annual percentage yield (APY) rates that different financial institutions offer on CDs can vary widely. So it’s important to shop around to make sure you’re getting the best CD rates available before you decide to open a new account. 

Short-Term CDs

As mentioned, CDs can have different terms. A short-term certificate of deposit is a CD account that gives you the option to withdraw your money (penalty-free) sooner rather than later. 

There’s no official cutoff point between short-term and long-term CDs. Yet, in general, a CD with terms of one year or less would be considered short-term. 

Some financial institutions may offer short-term CDs with terms as short as one month. Others may offer short-term CDs of three months, six months, nine months, 12 months, etc. 

Pros and Cons of Short-Term CDs

Pros

  • Potentially earn more interest toward shorter-term savings goals. 
  • Less risk of facing an early withdrawal penalty. 
  • Many CDs are FDIC-insured. 

Cons

  • Likely earn less interest than you would with a long-term CD.

Long-Term CDs

A long-term certificate of deposit is a CD account that typically features terms of two years or more. But again, there’s no official rule or cutoff point.

With some long-term CDs, you may agree to leave your money in the account for as long as five or even 10 years. In general, the longer you are willing to park your funds in a CD, the higher the interest rate a bank or credit union may be willing to pay you in return. 

Pros and Cons of Long-Term CDs

Pros

  • Interest rates tend to be higher than you might receive with short-term CDs. 
  • Many CDs are FDIC-insured. 

Cons

  • You might be more likely to withdraw funds early and face penalties. 
  • If interest rates go up, CD earnings might not keep up with inflation long term. 

Best Certificates of Deposit (CDs)

There are many great CDs on the market from online banks, credit unions, and other financial institutions. According to the Federal Deposit Insurance Corporation (FDIC), the average national deposit rate on a 60-month CD was 0.64% in August 2022. Yet at the time of writing, banks are offering APYs that exceed the national average—several with interest rate offers above 2.00% and even 3.00%. 

Here are a few current offers you might want to consider if you’re looking for a certificate of deposit: 

Marcus by Goldman Sachs
Marcus by Goldman Sachs

How to Choose the Best CD for You

Figuring out the best CD for your financial situation is a process. You’ll need to ask yourself some questions first. Once armed with those answers, some research may be in order. Here are a couple of tips to help you navigate the process of choosing a certificate of deposit account for your money. 

1. Figure Out Your Savings Goals 

A CD is a vehicle with the potential to help you earn more interest on your savings. Therefore, it’s wise to know what you’re saving toward to make sure you choose the right vehicle to help you reach your destination. 

Here’s an example. Let’s assume that you want to save money for a vacation, a wedding, or some other event that will occur within the following year. In such a scenario, the time you have to reach your savings goal has strict limits. Therefore, a short-term CD would likely be your best bet—allowing you to maximize your savings as much as possible while avoiding early withdrawal penalties. (Note: No-penalty CDs might also be worth looking into in situations like these.) 

2. Shop Around for the Best Deals

Once you figure out your savings goals and whether a short-term or long-term CD aligns best with those plans, it’s time to do some research. You’ll want to compare offers on CDs from multiple financial institutions to make sure you find the best deal for your situation. 

Here are some of the details you’ll want to pay attention to as you shop around for CDs.

  • Annual Percentage Yield (APY)
  • Early Withdrawal Penalty Fee
  • Minimum Deposit Requirement
  • FDIC Insurance
  • Reputation of the Bank or Credit Union

Alternatives to a Certificate of Deposit

A certificate of deposit is one potential low-risk way that you might be able to earn more money on your savings. Yet while CDs can be a solid savings choice for many people, they’re not a one-size-fits-all solution for every financial situation. 

For long-term savings goals, like retirement, starting with tax-advantaged accounts like 401(k)s and IRAs often make more sense. And if you’re currently working to pay down debt—especially high-interest credit card debt—you might want to consider paying a lump sum toward that goal to avoid costly interest fees.

Slick Tip: Not sure where you should begin? Consider speaking with a reputable financial advisor for guidance about your specific financial situation. 

For your short-term savings goals and funds that you prefer to keep more liquid (like emergency funds), there are other options that you might want to think about. For example, signing up for a new account that offers a generous bank account bonus or promotion might be an appealing option to some people. Others might be interested in a more traditional high-yield savings account or a money market account if for some reason a short-term or long-term CD doesn’t seem like the right fit. 

While we work hard on our research, we do not always provide a complete listing of all available offers from credit-card companies and banks. And because offers can change, we cannot guarantee that our information will always be up to date, so we encourage you to verify all the terms and conditions of any financial product before you apply.

Michelle Black
Michelle Black
Michelle Black is founder of CreditWriter.com and HerCreditMatters.com. Michelle is a leading credit card journalist with over a decade and a half of experience in the financial industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting, small business, and debt eradication. Michelle is also a certified credit expert witness and personal finance writer.

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