How to choose a CD term

Different CD conditions suit different savings goals.

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In today’s high-yield environment a CD (Certificate of Deposit) can be a great place to keep the money you save for the future. A CD can even help you increase your savings competitive interest rate.

But CDs also have certain limitations and details that you need to be aware of before you get started – including how long or term you need to keep your money in the account. If you choose a CD term that doesn’t align with your goals, you risk paying a prepayment penalty and losing the full amount of interest you thought you were earning.

In this article, we’re going to break down CD runtimes and show you how to make sure you choose the right one.

Explore your CD options here to see how much more you can earn.

How to select a CD term

Before you can choose the right CD runtime for you, it’s helpful to understand your runtime options and how different runtimes can meet your goals.

What are CD terms?

If you Open a discTerm is the time you need to hold your funds in the account to avoid an early withdrawal penalty.

Because you keep your money in the account for the entire term, you receive the fixed interest rate that you agreed upon when you opened the account. CD prices are often higher than even High Yield Savings Accountswhich can make the lack of flexibility a worthwhile trade-off for many consumers.

CD terms vary widely; You can find CDs that are only a month long, or five years, or even 10 years. It’s important to have a destination for your money when you open a CD so you can choose a run time that allows you to do both maximize interest and avoid penalties.

Find out more about CD conditions and current tariffs here.

When to choose a short-term CD

Common maturities for short-term CDs include three months, six months and one year. Short-term CDs are great for short-term goals, but may not offer as high interest rates as longer-term CDs. Often, short-term CD rates are more comparable to the rates offered by high-yield savings accounts.

However, that doesn’t mean that short-term CDs can’t be beneficial.

If you’ve already saved money for a specific goal, a short-term CD can help you keep the money safe. Plus, you retain the flexibility to move your money (or put it on another CD) in the near future.

Here are some examples of savings you can keep in a CD that lasts a year or less:

  • Funds for a holiday you want to book in the next few months
  • The cost of equipment you want to buy to complete an ongoing kitchen renovation
  • Savings to use on wedding expenses next year

With a short-term CD, you increase your savings at a competitive interest rate and are less tempted to spend the money elsewhere before you’re ready, as early withdrawal can result in a penalty fee.

When you should decide on a long-term CD

In general, you’re more likely to find the highest CD interest rates on longer CD maturities, such as B. three to five year old CDs. Since CDs have fixed interest rates, choosing a longer term can help you secure a competitive interest rate today – one that you will maintain even if interest rates fall over time.

Similar to shorter CD lives, it’s a good idea to have a goal in mind for the money you put into a long-term CD. You don’t want to risk paying an early withdrawal penalty. CDs also limit contributions (and many don’t even allow you to contribute after your initial deposit) so these accounts are best for the money you’ve already accumulated.

Here are some examples of types of savings that can be added to a long-term CD:

  • A down payment on a house you want to buy in a few years
  • Tuition fees for future further education or to supplement your child’s education
  • Money that you want to save and increase over the longer term, but don’t want to risk, in an investment account

Compare your long-term and short-term CD tariffs here.

Is a CD Right for You?

Having money set aside for a future goal allows you to earn a competitive interest rate and ensure your money is safe with a deposit receipt.

There are some cases where a CD might not be the best choice. For example, it’s often better to keep one emergency fund (which you may need to access in the short term) into a more flexible, high-yield savings account. Alternatively, long-term retirement savings may serve you better in a dedicated retirement savings account like one 401 (n) or IRA.

If you choose a CD, make sure you get the most out of it by choosing a term that will help you get the best combination of interest rate and accessibility for your goals.

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