Short-term vs. long-term CD: Which is right for you?

Certificates of deposit (CDs) are stable, fixed-term investments that provide a secure way to earn a guaranteed interest rate on your money. Because they are covered by NCUA or FDIC insurance, they are among the safest investments you can hold.

CD lengths can vary from a few months to several years. In addition to the interest rate, picking a term length that closely matches your needs and financial goals is an important consideration when choosing a CD. Here are the key details to know when comparing a short-term vs. long-term CD.

CDs pay a fixed interest rate for a predefined period. The CD term lengths you can choose from vary by institution, but typically range from three months to five years.

• Short-term CDs mature in less than one year. Common term lengths are three, six and nine months. Some institutions may offer terms as short as 28 days.
• Mid-term CDs mature in one to three years. Common term lengths are 12, 18, 24 and 36 months.
• Long-term CDs mature in four to five years (48 or 60 months). Some institutions offer terms as long as 10 years.

When the CD reaches its maturity date, you can withdraw your principal (the money you put into the CD) plus the interest your principal earned. You can then move the money to a different account or let it automatically roll over into a new CD.

When you choose a CD length, you're making a trade-off between potential risks and rewards. Ideally, you'll find a term that you feel comfortable setting aside money for and that pays a competitive rate.

No one knows where interest rates are headed — not even the members of the Federal Reserve Board, who arguably have more influence over rates than anyone else. All any of us can do is make an educated guess based on what's happening in the economy now and what seems likely to happen in the future.

If you expect interest rates to increase, you may not want to tie up your money in a mid-term or long-term CD. Conversely, if you expect rates to decrease, locking in today's higher rates for a longer term could pay off.

Let's say you want to buy a house in five years. You probably wouldn't want to invest your down payment in stocks: Your time horizon is not long enough to weather the market's shorter-term ups and downs. You're better off putting your money where you won't risk losing principal and can earn enough interest to keep pace with inflation. A high-yield savings account, money market account or five-year CD might fit the bill.

If you hate the idea of having money locked up at a lower rate when rates start going up, you might sleep better at night with a short- or mid-term CD. But if you don't trust yourself to not spend money that you need for a long-term goal, you might be comfortable securing a rate for five years.

Explore savings & CDs from Thrivent Credit Union

Explore flexible terms from three to 60 months, which could allow multiple options to set up ladders to meet your financial goals.

Learn more

If you haven't bought a CD before or need a refresher, you might not know why different terms pay different rates. Here's how CD interest rates work and how to choose the right maturity date for your goals.

In general, longer terms offer higher interest rates. However, when people expect rates to go down, you may see higher rates on short-term CDs than long-term CDs.

If you want to know where CD rates may be headed, pay attention to the Federal Open Market Committee's eight annual meetings. These reunions are where the Federal Reserve decides on monetary policies that influence the federal funds rate, which affects how much interest banks pay.

Short-term certificates of deposit are good vehicles for cash that you don't need to access immediately, but may need soon. If you tend to hold more cash than you need, a short-term CD can be a good option to earn more interest. It may even be OK to hold a portion of your emergency savings in a short-term CD.

You shouldn't put emergency funds in mid-term CDs. However, it could make sense to use a mid-term CD for savings you might need in two to three years, such as money for a larger, safer vehicle that accommodates children.

A long-term certificate of deposit can be good for longer-term goals. Once you've locked in your rate, you won't have to worry about reinvesting at a potentially lower rate until the CD matures. Of course, you may miss out if rates rise sooner.

You may want to use long-term CDs for the fixed-income portion of your investment portfolio and retirement accounts. They're also a good choice for general long-term savings.

Setting money aside in a CD is a smart way to plan for the future. Here are six strategies that can help improve your returns.

Laddering means dividing your principal among several CDs with different terms. This strategy lets you hedge against rate changes. If rates decrease, you'll be glad some of your money is locked up longer. If they increase, you'll be glad you're getting some of your money back sooner to reinvest at a higher rate.

A CD ladder can also reduce your risk of paying early withdrawal penalties if you need your savings sooner than expected. That said, not everyone has the bandwidth to manage multiple CDs, and it's okay if you prefer simplicity over optimization.

Most institutions charge an early withdrawal penalty if you open a CD account then want to withdraw your principal before the term ends. The penalty typically means losing some of the interest you earned. For example, you might forfeit 90 days of interest when closing a 36-month CD prematurely.

No-penalty CDs may pay a slightly lower interest rate in exchange for the flexibility to cash out anytime. They can be a good choice if you're not sure how soon you'll need your savings.

You may have the option to receive regular interest payments during your CD term. Allowing the interest to accumulate instead will give you a larger principal balance to reinvest when your CD term ends, helping your returns grow faster through compounding.

CD rates for the same term can vary considerably by financial institution. You might earn almost no interest on a 12-month CD at one bank and 4% at another. Make sure you're getting a competitive rate by shopping around.

Many CDs renew automatically at a different rate. You may only have a few days to take your money out before you're locked into the new rate and subject to an early withdrawal penalty. If you want more flexibility to find the best rates when your term ends, consider opting out of automatic renewal.

The right CD term length for you allows you to accomplish your goals effectively with a comfortable amount of risk. That often means matching the maturity date with when you think you'll need the money.

Of course, that isn't always easy, and it can require careful planning. A Thrivent financial advisor can help you figure out which CD term lengths fit into your overall financial strategy.