Certificates of deposit (commonly referred to as CDs) are a reliable savings option offering a guaranteed interest rate for a specified period of time. CDs typically provide a higher interest rate than a standard savings account, but are still covered by deposit insurance. The crucial decision lies in choosing the right term length for your CD. CD terms can vary from a few months to several years, and understanding the core differences between term lengths is key. Let’s take a closer look at some of the pros and cons of short and long-term CDs.
Short-Term CDs: Flexibility and Quick Access
Generally, short-term CDs are considered to be CDs with terms of one year or less. Common short-term CD options include 3-month, 6-month, and 12-month terms. Because CDs typically come with penalties if you withdraw your funds before the end of the term, the primary advantage of a short-term CD versus a long-term CD is the ability to access your money sooner. Short-term CDs may be the right fit if you:
Long-Term CDs: Maximizing Returns Over Time
Long-term CDs typically have terms of one year or more, extending to 2, 3, 5 years, or even longer. Many people like the idea of locking in an interest rate for an extended period of time, especially when rates are expected to decline. Some key advantages of long-term CDs include:
The CD Ladder Strategy: A Blend of Both Worlds
Many savvy savers utilize a “CD ladder” strategy which involves dividing funds into multiple CDs with varying terms in order to benefit from longer CD terms while still ensuring access to funds at regular intervals. Here’s how the strategy works: Imagine that you have $12,000 you want to invest in a CD. You want to lock in an attractive rate being offered on a 3-year CD term, but you don’t want all of your money tied up for that long. So instead, you split your deposit into three $4,000 CDs. You invest:
Finding Your Ideal CD Strategy
Ultimately, the best option for you - whether a short-term CD, a long-term CD, or a combination of both - depends on your unique financial situation and liquidity needs. Consider when you'll need access to your funds, your risk tolerance for investments, and your overall savings goals. When you’re ready to start earning interest with a CD, BankFive offers a variety of term lengths ranging from 3 months to 5 years. Explore our CD options today to find the perfect fit for your financial future.
Short-Term CDs: Flexibility and Quick Access
Generally, short-term CDs are considered to be CDs with terms of one year or less. Common short-term CD options include 3-month, 6-month, and 12-month terms. Because CDs typically come with penalties if you withdraw your funds before the end of the term, the primary advantage of a short-term CD versus a long-term CD is the ability to access your money sooner. Short-term CDs may be the right fit if you:
- Anticipate needing funds relatively soon: If you have a known expense coming up in the near future that you will need funds for, a short-term CD allows you to earn a higher interest rate than a traditional savings account without tying up your money for too long.
- Want to capitalize on potentially higher interest rates down the road: In an environment where interest rates fluctuate often, a short-term CD allows you to reinvest your money at a potentially higher rate once the CD matures. This can prevent you from having your money tied up in a CD with a lower rate than what is currently being offered elsewhere.
Long-Term CDs: Maximizing Returns Over Time
Long-term CDs typically have terms of one year or more, extending to 2, 3, 5 years, or even longer. Many people like the idea of locking in an interest rate for an extended period of time, especially when rates are expected to decline. Some key advantages of long-term CDs include:
- Long-term earning potential: If you have funds that you don't anticipate needing for several years, a long-term CD can earn you substantially more money than a traditional savings account.
- Predictability of returns: The ability to lock in an attractive interest rate for an extended period of time, regardless of market fluctuations, is a strong selling point of long-term CDs. While returns on stocks, bonds, and even savings accounts are unpredictable and can fluctuate, a CD provides a reliable, fixed rate of return.
The CD Ladder Strategy: A Blend of Both Worlds
Many savvy savers utilize a “CD ladder” strategy which involves dividing funds into multiple CDs with varying terms in order to benefit from longer CD terms while still ensuring access to funds at regular intervals. Here’s how the strategy works: Imagine that you have $12,000 you want to invest in a CD. You want to lock in an attractive rate being offered on a 3-year CD term, but you don’t want all of your money tied up for that long. So instead, you split your deposit into three $4,000 CDs. You invest:
- $4,000 in a 1-year CD
- $4,000 in a 2-year CD
- $4,000 in a 3-year CD
Finding Your Ideal CD Strategy
Ultimately, the best option for you - whether a short-term CD, a long-term CD, or a combination of both - depends on your unique financial situation and liquidity needs. Consider when you'll need access to your funds, your risk tolerance for investments, and your overall savings goals. When you’re ready to start earning interest with a CD, BankFive offers a variety of term lengths ranging from 3 months to 5 years. Explore our CD options today to find the perfect fit for your financial future.