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Short-Term vs. Long-Term CDs: Which is Best?

Both short-term and long-term CDs have unique benefits for depositors.

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The Federal Reserve raises the federal funds rate Since early last year, and unfortunately leading to higher rates on mortgages, credit cards and other borrowing products, it also has a silver lining: higher savings rates on savings accounts.

just look Certificate of Deposit (CD) account for proof

CD – A type of storage device that provides A guaranteed return Seen after a certain time rate A significant jump in recent months. actually, Many accounts are now offering rates of 5% or more. On a $5,000 deposit, that means $250 earned in just 12 months. In 10 years, it will be more than $3,100.

Still, not all CDs are created equal. As you can see, the returns can vary quite a bit depending on it CD length or sound. you Consider a CD account As for your investment goals? Below we’ll break down how to choose between short-term and long-term options.

Start exploring CD rates here now to see how much more you can earn

What are short-term CDs and when are they the best option?

Short-term certificates of deposit usually last from three months to one year, although some banks may offer a one-month option.

“It can be best for people who want to be relatively liquid,” says Ron Tallu, owner of Tallu Financial Services in Troy, Michigan.

The biggest disadvantage of short-term CDs is that they don’t allow much time for growth, so your income will be much lower than what a long-term CD might offer.

Still, for investors who need a guaranteed return and access to their cash in a short period of time, they can be a smart choice.

“They’re best suited when you want a safe and predictable return on money that you won’t need immediately but may need a little later,” says Scott Butler, a financial planner and certified retirement counselor at Clounberg Retirement Solutions in Laurel, Maryland. “For example, if you need a down payment to buy a house in six months, a six-month CD might be a good choice.”

Explore short and long term CD options here now to see which one is best for you

What are long-term CDs and when are they the best option?

Long-term CDs typically range from three to 10 years. These give your funds more time to grow, but they also tie up your cash, making it more difficult (and expensive) if you find yourself in an emergency. Most CDs have an early withdrawal penalty of a year or more of interest.

“The longer the tenure, the higher the yield, but also the higher the fees to get your money out,” says Tallu. “If you’re considering a long-term CD, make sure you have some money in savings to cover emergencies.”

Long-term CDs can be a good option if you’re saving for a distant goal and are satisfied with relatively low returns. Although CDs offer a solid rate, it’s often lower than what you can earn through other investments like the stock market. Although risky, the average stock market return is typically around 10% annually.

“These CDs are best suited for investors who want to lock in a predictable interest rate,” says Butler They may be more attractive to investors concerned that interest rates will fall in the future and riskier investments will decline.”

How to use both

You don’t necessarily have to choose one term or the other. A common savings strategy is called CD ladder Actually you can use both.

“Combining short-term and long-term CDs is one possibility,” says Dan Casey, an investment adviser and founder of Bridgeriver Advisors in Bloomfield Hills, Michigan. “This strategy involves buying multiple CDs at different maturity levels, so your investment is fully liquidated at regular intervals.”

With Ladder, you buy CDs in different ranks. Then, as the short-term CDs mature, you either use those returns or reinvest in an additional CD to continue up the ladder.

“In general, the longer the term of the CD, the higher the interest rate,” says Butler. “Investors sometimes use a CD ladder to combine the high interest of long-term CDs and the good liquidity of short-term CDs with interest rate lock-in.”

Shop around before you open a CD account

Whatever type of CD account or method you decide on, make sure Make purchases for your account. Rates and fees can vary significantly from one bank to another, so you can ensure you get the best deal by at least comparing a few different institutions. You can now easily compare CD options here or through the table below.

MoneyWatch: Managing Your Money

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