Certificates of Deposit (CDs) have been a common method of modern investing for most Americans since the 1960s due to their competitive interest rates and guaranteed returns. But, one question still weighs heavily on many first-time investors’ minds—is a long-term or short-term CD best? Our team at Legacy Bank is dedicated to helping customers across the state meet their financial goals and is detailing the differences between short-term and long-term CDs. Take a seat, grab a pen and pencil or open your notes app, and keep reading to learn more!

How Do Certificates of Deposit (CDs) Work?

Unlike traditional savings accounts, CDs allow individuals to deposit a specific sum of money for a predetermined period while earning a fixed interest rate over that time. All you have to do is leave your money untouched for the predetermined amount of time, and you will receive guaranteed returns, even if your bank drops the rates on savings accounts and new CDs.

A Real-World Example:
If you open a $5,000, 11-month CD with a 5.25% annual percentage yield, your account would be worth $5,240 after 11 months, assuming you keep interest payments in the account for the whole CD term.

These investment instruments have remained appealing to customers due to their typically higher interest rates and various term options (four (4) weeks to five (5) years). That’s where the question emerges—is a long-term CD better than a short-term CD?

Short-Term CDs

The main difference between short-term and long-term CDs is their maturation periods, with short-term CDs typically having maturities anywhere from a few months to a year. Compared to their long-term counterparts, short-term options often offer lower interest rates but, at the same time, provide quicker access to your funds. In general, these types of CDs are well-suited for investors who want to keep their money secure for a brief period while earning higher interest than they would with a standard savings account.

Benefits

Liquidity: You will receive more frequent access to your funds, making it less likely that you will need to withdraw money before the CD matures.

Interest Rate Flexibility: With short-term CDs, you can take advantage of rising interest rates sooner, as you can reinvest your funds at the end of the term.

View our short-term time deposit (CD) rates here!

Long-Term CDs

Long-term CDs have maturities extending beyond one year, often ranging from two to five years or longer. These CDs appeal to investors with a larger investment portfolio who are willing to commit their funds for a more extended period in exchange for a higher interest rate. Long-term CDs can be an excellent investment if you believe interest rates will drop soon, as you can lock in a guaranteed rate for the entire duration of your CD.

Benefits

Higher Interest Rates: Long-term CDs generally offer higher interest rates than short-term CDs, providing the opportunity for increased earnings over time.

Interest Rate Stability: With a fixed interest rate for the entire term, long-term CDs shield investors from the impact of fluctuating interest rates.

View our long-term time deposit (CD) rates here!

Which Is Right for You?

Now it’s time to answer the burning question—which is the right choice for your financial goals? While there’s no universal answer for every customer, you should consider your own financial goals and investment habits to help you come to a decision. If you anticipate needing access to your funds in the near future and value flexibility, a short-term CD may be the better option.

On the other hand, if you have a longer investment horizon, are comfortable with less frequent access to your money, and seek higher potential returns, a long-term CD may be the best fit. Regardless of your choice, it’s ultimately best to consult with a financial advisor or one of our team members at Legacy Bank to ensure your investment strategy aligns with your overall financial plan!