How Long Should You Keep Money in a CD?
December 6, 2024
When you manage savings, picking the right account is very important. One choice many people look at is a certificate of deposit (CD). According to the FDIC,[1] the average interest rate for a 12-month CD is higher than the average rate for a regular savings account. This means that a CD could earn more money than a regular savings account if you keep your funds in it for a longer time
But how long should you keep money in a CD? This article will explain CD terms, how they work, and what you should think about when deciding the best length for your money.
What Is a CD Term?
A CD term is the length of time you agree to keep your money in a CD. When you open a CD, you choose a specific term, which can range from a few months to several years. During this time, you may not be able to take out your money without paying a penalty.
In return, the bank pays you interest on your deposit, usually at a higher rate than a regular savings account. After the term ends, also known as the “maturity date,” you can withdraw your money along with the interest earned.
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How Do CD Terms Work?
CD terms set the amount of time your money stays in a CD, during which it earns interest at a fixed rate. When you open a CD, you pick a term length. It may be six months, one year, or even five years, and your options depend on the bank.
The bank agrees to pay you interest on your money for that full term. The catch is that, during this time, you generally can’t withdraw your funds without paying a penalty. So, you’re trading some flexibility for the chance to earn more interest than you would with a regular savings account.
Once the term ends, called the “maturity date,” you can withdraw your money along with the interest you’ve earned.
At this point, you have a few options:
- You can cash out all the money.
- Roll it over into another CD.
- Move it to a different type of account.
The fixed rate during the term means that, no matter what happens to interest rates in general, your CD will keep earning the same rate you locked in when you opened it. This can be especially helpful when interest rates are low. You can lock in a decent return without worrying about changes in the market.
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Short-Term vs Long-Term CDs: Which Is Better?
Deciding between short-term and long-term CDs depends on your financial goals and needs.
Who Should Consider Short-Term CDs?
Short-term CDs usually have terms ranging from three months to one year.
They can be ideal for:
- Emergency savings.
- Upcoming expenses.
- Interest rate changes.
- Low risk aversion.
If you want to keep your money available while earning interest, short-term CDs are a great choice. They help you grow your savings while allowing access to your funds at a closer maturity date. If you plan to buy something big soon, like a car or home renovation, a short-term CD keeps your money safe and earns interest until you need it.
If you think interest rates will go up, a short-term CD lets you reinvest your money later for better rates. Overall, short-term CDs offer a good mix of safety and earning potential without tying up your money for too long.
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Who Should Consider Long-Term CDs?
Long-term CDs typically have terms ranging from one year to five years or longer.
They may be suitable for:
- Longer-term financial goals.
- Stability.
- Interest rate lock.
- Budgeting for the future.
If you don’t need quick access to your money, a long-term CD can offer higher interest rates. These CDs are great for saving for future costs, like a home down payment or retirement. They provide a safe way to grow your savings without worrying about market changes.
If you find a good interest rate, locking it in with a long-term CD can be a smart move, especially when rates are higher. Plus, committing to a longer-term CD helps you plan your budget and encourages better saving habits by keeping your money set aside for a while.
How To Choose a CD Term Length
When deciding how long to keep money in a CD, consider the following factors:
- Financial goals
- Liquidity needs
- Interest rates
- Penalty policies
- Current savings
- Market trends
- Personal preferences and risk tolerance
To choose the right CD term length, first, identify your financial goals. If you’re saving for a wedding next year, a short-term CD is better. Consider how quickly you may need access to your funds; if soon, pick a shorter term; if not, go for a longer one.
Watch interest rates—if they might rise, a shorter term may be best; if higher, but you think the rates could fall lower, locking in a longer term could be wise. Understand penalties for early withdrawal and select a term that fits your comfort level. If you have enough emergency savings, a longer-term CD can help you earn more interest.
Stay updated on financial news, as it can affect your savings plans. Finally, reflect on your risk comfort; some prefer fixed rates for security, while others like quick access to funds.
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How Long Does it Take to Cash Out a CD?
Cashing out a CD usually takes one business day after the maturity date. If you need to withdraw funds before maturity, it may take longer and could involve penalties. Always check with your bank for specific timelines and rules.
Choose the Right CD With Centier by Your Side
In conclusion, deciding how long to keep money in a CD depends on your personal circumstances and financial goals. Short-term CDs can provide flexibility, while long-term CDs can offer better interest rates. It’s essential to evaluate your needs and preferences when choosing a CD term length.
If you want to learn more about how CDs can fit into your financial strategy, find out more about our CDs and IRAs.
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