Short- or long-term CD: Which is best for you?

If you're considering putting some of your money into a CD, you probably already know that once you do, you'll have to leave it in the account for a set period of time that can vary between one month and five years, or even longer.

So, short-term CD or a long-term one? That is the question.

There's no simple answer. In general, the longer you promise to keep your CD open, the more the bank or credit union is willing to pay you in interest because it can count on using your money to do business for longer.

However, that's only true up to a point. CD annual percentage yields, or APYs, also reflect market expectations for interest rates. So if rates are expected to rise in the short term, but fall after a year, APYs for CDs with terms longer than a year may not be higher than some shorter-term CDs.

So, if you're just looking for the highest possible APY, you have an answer. But rate of return isn't the only thing to consider when choosing a CD. You should also think through when you'll need your money, how sure you are about that timeline, and where the economy may be headed.

Let's address those factors one by one.

Your timeline

When will you need the money? The more defined your timeline, the easier it's likely to be for you to choose a term for your CD. If you’re saving up for a home purchase that’s five years away, for example, a five-year CD can help you save more than if you kept your money in a savings account.

If you're planning a vacation for next summer, a one-year CD might do the trick. Want to be sure you have enough money to buy your daughter that high school graduation present she asked for in eighth grade? Four-year CD ahoy!

In short, the clearer you are about how long you have to save, the easier it will be to pick a term.

Once you've set your goal, take a hard look at your situation. Can you afford for that money to be off-limits? Remember, you'll pay a penalty if you withdraw from your CD early, so some planning is in order. Of course, you can't plan for emergencies, but don't put so much money away that you're stretching your finances beyond what you can handle.

You should also consider market expectations for interest rates, which directly affect the APYs available on CDs. The good news is you don’t have to guess. As we mentioned earlier, CD rates reflect market participants’ expectations for interest rates, and the rates offered on CDs will show you what banks and credit unions expect.

So there you have it. To choose between a short- or long-term CD, shop the APYs and terms offered for different CDs, and go for one that best fits your goal and your budget. No one has a crystal ball, but if you take the time to do some due diligence, you should be able to find a CD that works for you.

Ready to shop for a CD? Consider one from a federally insured issuer in our list below.

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