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

How to choose the right term length for you

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A certificate of deposit (CD) is a financial product offered by banks and credit unions that pays interest yields in exchange for leaving a deposit in the account for a certain term. CD terms can range from as short as one month to up to 10 years.

In most cases, the longer you agree to leave your money in the CD, the higher return you can earn. However, you often can’t access the money in the CD before the maturity date without paying a penalty. Learn more about how to decide if a short-, medium-, or long-term CD is best for you. 

Key Takeaways

  • CDs are available in a range of maturities, from short-term—lasting up to one year—to long-term, often requiring commitments of five years or more. 
  • In most cases, the longer the CD term, the higher the annual percentage yield (APY) and the more you will earn. 
  • When your money is in a CD, you often can’t withdraw it early without paying a penalty that will reduce or cancel your earnings.
  • A CD ladder is a popular strategy that helps you get the best of both short- and long-term CDs.

While opinions vary from one bank or financial institution to the next on the definition of short-, medium-, and long-term CDs, we’ve broken their terms down as follows.

Short-Term CDs

Short-term CDs are those with terms of one year or less. When you sign up and deposit your money, you’ll need to leave it in the account until your maturity date. If you withdraw the deposit early, many institutions will hit you with an early withdrawal penalty, which reduces your earnings from the account.

No-penalty or liquid CDs do exist without early withdrawal penalties. However, they also often have lower rates.

The benefit of short-term CDS is that your money won’t be tied up too long, which can be good if you might need access to it. The bad part of these CDs is the shorter the term, the lower the APY.

When looking at a one-month CD, for example, the average national rate as of March 1, 2022, was 0.03%, while a 1-year CD offered an average return of 0.14%. That said, be sure to shop around because the best 1-year CDs at that same point had rates from 0.80% up to 1%.

Medium-Term CDs

If you have cash that you are fairly confident you won’t need to access in the next two to three years, you may want to opt for a medium-term CD. The national average interest yield on a 24-month CD as of March 1, 2022, was 0.18%, while the yield rate on a 36-month CD was 0.21%. Further, the best 2-year and 3-year CD annual percentage yields (APYs) at time of publication ranged from 1.05% up to 1.60%. 

With the longer commitment, you stand to earn a bit more in return. This may be a good route to take once you have a separate nest egg built up. Then, if you need funds, you won’t have to resort to withdrawing from the CD early. Like the short-term CD, early withdrawals often come with penalties. 

Long-Term CDs

A long-term CD is often defined as one with a term longer than five years or more. While 4- and 5-year CDs are common, you can find a handful of CDs with terms as long as 10 years. The biggest benefit of long-term CDs is they typically have the highest APYs of all durations of CDs.

The best 5-year CD rates as of March 1, 2022, for instance, ranged up to 1.90% APY while 6- to 9-year CD rates were as high as 1.95% APY. With fewer 10-year CDs on the market, the highest rates dip a bit, only reaching around 1.50% at time of publication. That being said, the national average rate at the start of March 2022 sat much lower at 0.22% for 48-month CDs and 0.28% for 60-month CDs. 

If you have a lump sum of money that you won’t need for four or more years, a long-term CD is worth considering. If you signed up for a 5-year CD with a 1.75% APY, for example, and your interest compounded monthly, you could turn $10,000 into $10,913.73 over the 5-year period.

How To Choose the Right Term for You

The right CD term for you is going to depend on your priorities when it comes to returns and liquidity. If you are new to CD investing and just want to get your feet wet, you may want to start small with a short-term CD. 

Those who are more experienced—and sure they won’t need the money for several years—may feel comfortable opting for a longer-term CD, such as one with a 5- or 10-year term. Other people may fall somewhere in the middle. 

Only you can analyze your current financial situation and preferences to decide what’s right for you for a CD term. 

To help in that process, here’s a look at how much the various CD term lengths would pay on a $10,000 deposit based on the average national rate and the best rate offered as of March 1, 2022, according to our data.

CD term Deposit Amount Return According to National Average Rate Return According to Best Rate Rankings
1-month $10,000 $10,000.25 NA
3-month $10,000 $10,001.50 $10,015
6-month $10,000 $10,004.50 $10,038
12-month $10,000 $10,014 $10,100
24-month $10,000 $10,036 $10,253
36-month $10,000 $10,063 $10,491
48-month $10,000 $10,088 $10,725
60-month $10,000 $10,141 $10,996
96-month $10,000 NA $11,687
As of March 1, 2022

Rates change daily, but this table gives you an idea of how much more return you potentially can earn by shopping around for the best term for you, at the best rate.

CD Ladders

A popular CD investment strategy is referred to as building a CD ladder. The way it works is that you simultaneously invest money in various CDs with different term lengths. For example, you might split your money between 1-year, 2-year, 3-year, 4-year, and 5-year CDs. If you decided on investing in five CDs, as in this case, you’d have what’s called a five-rung CD ladder. 

When you use this approach, you can take advantage of the higher APYs of longer-term CDs without tying up all your money for the longest term. Your CDs will mature gradually, so your money will become available again in rolling portions. Then, you can decide to reinvest it or withdraw it, based on your needs at that time. 

Using the above example, if you decide to reinvest all your CDs into 5-year CDs as they mature, you could continue to have one mature each year and would benefit from the higher APY available.

The CD ladder strategy gives you a way to ease into investing in long-term CDs without losing all your liquidity at once.  

The Bottom Line

CDs are low-risk investment accounts that reward longer-term deposits with higher returns. However, short- to medium-term options are available if you’d like to sacrifice a bit of the return for more flexibility. On the other hand, you could adopt the CD ladder strategy to stagger your investments and get the benefits of both liquidity and higher APYs. 

Frequently Asked Questions (FAQs)

How do I know how long a CD’s term is?

CDs are advertised according to their terms, so you will see one-month CDs, 12-month CDs, 5-year CDs, and so on. You can compare the rates and terms to figure out which one best fits your needs. 

Why are CD rates so low?

CD rates are on the lower end of investment vehicles in terms of return because they come with little risk. You are guaranteed to get the amount promised at the outset, at least up to the $250,000 insured by the FDIC. As you take on riskier investments, you stand to earn more—and possibly lose more. 

Which banks and credit unions have the best CD rates?

We are consistently monitoring financial institutions and their CD rates to rank the best of the best. Check out The Balance's best CD rates available this month. 

Article Sources

  1. Raymond James. “Investing in Brokered Certificates of Deposit.”

  2. Consumer Financial Protection Bureau. “What Is a Certificate of Deposit (CD)?

  3. First Republic Bank. “Certificates of Deposit.”

  4. Federal Deposit Insurance Corp. “National Rates and Rate Caps.”

  5. First Republic Bank. “What Type of CD Is Right for You?

  6. CIT Bank. “CD Calculator.”

  7. Fidelity. “Model CD Ladders.”

  8. FDIC. “Deposit Insurance FAQs.”