Short-Term CD vs. Long-Term CD: Comparison & Which To Choose

Investors should choose short-term or long-term CDs depending on their investment goals, their time horizon, and how the rest of their portfolios and savings are structured. Short-term CDs offer lower interest rates, but the time frames make it easy to withdraw the money if you need it. Long-term CDs are better utilized as part of a lengthy investment strategy, such as saving for retirement.

When you’re trying to decide where to place your hard-earned money to watch it grow, there are a few factors to consider. What is the goal of the investment? Is it to save for retirement, or is it to grow some spare cash by investing in a way that beats inflation? Are returns the most important feature of this investment, or is safety key? Finally, the time horizon is among the most important facets to consider. When and how can you access this cash? If you choose to invest in CDs, deciding between a long-term and short-term time frame is of the utmost importance.

CDs (or certificates of deposit), like money market accounts, are federally backed investment vehicles that allow you to park money for various time periods. There are CDs with terms as short as six months and as long as five years or more. With CDs, the interest rate usually rises with the length of the term. Short-term, low-yielding CDs are great places to park cash for a while. Long-term CDs are typically utilized for financial goals set well into the future, such as retirement. Many investors will opt for a time frame in the middle. Below, we review the benefits and drawbacks of both long- and short-term CDs.

How do CDs work?

A CD is a type of investment vehicle that works as a timed deposit. The investor locks up their money for a certain period of time until the maturity date. During this locked-up period, the investor earns interest based on the annual percentage yield or APY. Once the CD reaches its maturity date, the investor receives the principal back along with interest. CDs are offered by banks, credit unions, and other financial institutions. As your CDs are insured by the FDIC or NCUA (National Credit Union Administration) up to $250,000 per bank, they are considered among the least risky investments available. However, if you withdraw the money from a CD before it matures, you will most certainly face some type of early withdrawal penalty.

CD time frames

Different financial institutions will offer different CD structures and time frames. What you choose will depend on your goals and preferences. Say, for instance, you inherited a lump sum of $10,000 from your grandmother. There are many options available. You could invest it in the stock market, but maybe the market is currently in a downward trend. You could also invest it in cryptocurrency, but its infamous volatility can make it difficult to stomach. However, if you stick that money in a CD, you are guaranteed to get it back with interest paid. The only question is how long you lock it up for.

Pro Tip

CDs do not come in a one-size-fits-all structure in terms of a yearly APY. In fact, there can be interest rate changes within the CD, as with a step-up CD rate that increases every few months. It’s important to understand how CDs work in general before choosing a certain CD structure.

Short-term CDs

Although not set in stone, the general rule for short-term CDs is that they last less than a year. Interest rates will vary depending on just how short the term is. Here is an example of what short-term CD rates might look like from typical banks and credit unions.

Time FrameAPY
30 days1.45%
3 months1.7%
6 months2.0%
9 months2.5%
1 year3%

When would you use a short-term CD?

People use short-term CDs to maximize liquidity and still enjoy the benefits of an insured deposit account with higher interest than traditional savings accounts. Most investors with short-term CDs are not looking at the investment from a macro perspective. Rather, they are looking to park cash for a while and then use it for something else.

For example, if you need $20,000 for a down payment on a house but only have $15,000, you might get a six-month CD to earn interest on the money. You can then save the additional money for your down payment during this period, and afterward, you can officially start house hunting.

Pros and cons of short-term CDs

WEIGH THE RISKS AND BENEFITS

Depending on your goals, a short-term CD might be right for you.

Pros
  • Guaranteed returns
  • More liquid, money only locked up for a short period of time
  • A lower deposit is needed
  • FDIC insured
Cons
  • Interest rates and returns will generally be lower
  • Other similar deposit accounts might offer higher APY

Looking to park some money for a while and earn some interest? Here are some banks that offer CDs with various terms and rates.

Long-term CDs

Long-term CDs have terms lasting up to 10 years and possibly even more. Unlike short-term CDs, which are often used for temporarily parking cash, long-term CDs are typically used as part of a greater investment strategy. As the money is locked up for a longer period of time, the return is higher. Here is an example of what you might be able to earn with a longer-term CD.

Time FrameAPY
3-year4.22%
4-year4.32%
5-year4.42%
7-year4.7%
10-year5.2%

When would you use a long-term CD?

Long-term CDs are routinely used in conjunction with a variety of other investments that constitute a working portfolio, often for retirement. CDs are a great way to manage the risk of an overall portfolio, as the rates are guaranteed and most don’t move up and down with the Fed or stock market.

For instance, let’s say that you have a retirement goal to have $1,000,000 in assets in your personal portfolio, available to you in 20 years. Part of that portfolio will need to consist of potentially high-returning stocks, bonds, funds, and whatever other financial vehicles you favor. Stocks and bonds will typically behave in line with the market, whereas CDs do not.

WEIGH THE RISKS AND BENEFITS

Consider both sides of a long-term CD before you make a decision.

Pros
  • Guaranteed return
  • Higher APY than shorter-term CDs
Cons
  • Money is illiquid, locked up for a significant period of time
  • Potentially less return than other long-term investments

How to choose a CD?

You don’t have to decide either/or when choosing long-term vs. short-term CDs. In fact, you can have a mixture of both. Many people utilize something called CD laddering, which is investing in multiple CDs with different time frames. This allows you to have access to cash in the short term while earning interest and saving for retirement over a longer period of time.

Remember, the most important benefit of a CD is the federal backing of returns. CDs are quite easy to calculate. When you are planning, you don’t have to estimate a return on investment; you can know it outright.

FAQ

What is the best term for a CD?

There is no best term for a CD; it depends on your priorities. If time frame and relative liquidity are important, then you might opt for a short-term CD. If return and a higher APY are important, you might opt for a longer-term CD. Also, if you are concerned about early withdrawal penalties, you might opt for a shorter-term CD.

Are short-term CDs worth it?

Short-term CDs can be a great way to park cash for a while and then use it for something else after generating a return.

How long should a CD term be?

A CD term really depends on the investor. If you want a stable pillar for retirement, then a long-term CD might be the best option for you. If you are looking for somewhere to park cash to be used for something else in the future, a shorter-term CD might be better for you.

Will CD rates go up in 2023?

We can’t say for sure; pay attention to the markets and the Fed’s interest rate.

Are 2023 CDs worth it?

They can be a worthwhile part of your overall investment portfolio. If you are saving for retirement, you don’t want all your money in CDs. Instead, they can be used as a stabilizing component of a portfolio that allows the investor to make a guaranteed return regardless of the state of the market.

Key takeaways

  • CDs allow an investor to lock up money with a financial institution for a set term while receiving interest.
  • Short-term CDs usually have time frames under a year and are considered more liquid. They often require a lower deposit. However, they do not offer interest rates as high as those of a longer-term CD.
  • Long-term CDs have terms that are usually a period of years. Because of this, they are less liquid and often require a larger deposit. But they offer a higher interest rate than a short-term CD.
  • Short-term CDs are used as a place to park cash for a while, while longer-term CDs are often part of an overall investment strategy and portfolio. They are considered an ultra-safe pillar of a portfolio, as they are backed by the U.S. government.
View Article Sources
  1. Certificate of Deposit (CD) – Cornell Law School
  2. What is a Certificate of Deposit? – SuperMoney
  3. Compare CD Rates – SuperMoney