Key insights:
- A certificate of deposit (CD) is a type of savings account that offers a fixed interest rate for a set term
- Short-term CDs generally have terms of 12 months or less and are better if you know you’ll need access to funds in the near future
- Long-term CDs generally have terms beyond 12 months and are useful if you don’t need immediate access to the funds and want to earn interest for an extended period
Certificates of deposit (CDs) are fixed-term savings products that can help you earn a guaranteed interest rate over the CD term. There are different types of CDs, but when deciding the right CD for you, the most important question is whether a short-term or long-term CD aligns with your goals and timeline.
There are advantages and disadvantages to both, so it’s important to understand how they work. Let’s explore how these savings options differ, how current market conditions impact CD rates and how to align your choice with your financial goals and timeline.
What is a short-term CD?
A short-term CD is a savings account option with a fixed interest rate and a maturity period that typically ranges from 3 to 12 months. It lets you earn a guaranteed return in a relatively short time, often at a higher rate than a standard savings account. This can make it a practical, low-risk way to grow your money.
The brief commitment period means you can access your funds sooner than you could with a long-term CD, which may be helpful if you have near-term goals or upcoming expenses.
Short-term CDs can provide a balance of earning interest and flexibility, allowing you to take advantage of competitive interest rates while keeping your savings working for you. Just be sure to plan so you can avoid early withdrawal penalties and enjoy the full benefit of your savings.
What is a long-term CD?
A long-term CD is a type of savings account that locks in your money for a period that usually ranges from 3 to 5 years or longer. By committing to keep your funds in the CD for a longer term, you typically earn a higher interest rate than you would with a short-term CD or a standard savings account. The interest rate remains fixed for the entire term.
The trade-off is access. Long-term CDs require a greater commitment of time. Additionally, withdrawing funds before maturity may result in higher early withdrawal penalties than short-term CDs, which can reduce or eliminate your earned interest. But if you don’t need access to the funds in the short term, a long-term CD may be a strong option.
Key differences between short-term and long-term CDs
Choosing between a short-term and a long-term CD comes down to how long you wish to commit your money, the interest rate you want to secure and how soon you might need access to your funds. Both options are possible savings tools, but their features align with different financial goals.
The table below highlights the main differences to help you decide.
| Feature | Short-term CDs | Long-term CDs |
|---|---|---|
| Term length | 3 to 12 months | 3 to 5 years or more |
| Interest rates | Often lower than long-term CDs | Typically higher, requiring longer commitments |
| Liquidity and access | CD maturity is sooner, offering greater flexibility | Funds are tied up longer, better for long-term goals |
| Early withdrawal penalties | Usually smaller, but can still reduce earnings | Often larger, which may wipe out interest earned |
Types of CDs
There are several types of CDs that support different timelines.
- Fixed-rate CDs: Traditional CDs offer a fixed rate for a set period. You can typically choose your own term, ranging from 3 months to 5 years.
- Step-up CDs: These short-term CDs offer scheduled rate increases during the CD term. For instance, a 30-month step-up CD may offer rate increases on your account after 10 and 20 months.
- No penalty CDs: These short-term CDs let you lock in a fixed interest rate and withdraw your funds early without fees, after an initial waiting period.
When a short-term CD may make sense
If you know you’ll need your funds in the near future — such as within the next several months — a short-term CD may be a preferred option. Because it matures in just 3 to 12 months, your funds stay parked but become available sooner, making it a smart choice for planned expenses or upcoming financial goals.
Short-term CDs may be especially appealing when federal interest rates are expected to rise. The shorter commitment lets you reinvest sooner at potentially higher rates, giving you both flexibility and the opportunity to keep your money working at its best.
When a long-term CD may be better
A long-term CD may be a strong choice when you want to lock in a higher interest rate and are confident you will not need the funds for several years. The longer maturity period allows your money to grow at a predictable rate, providing stability even if federal interest rates go down.
Long-term CDs work best for people with clear long-term savings goals, such as a down payment or a nest egg. Because the funds are committed for 3 to 5 years or longer, it’s important to deposit money you won’t need for emergencies or everyday expenses.
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
