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After seeing her savings account rate decrease last summer, Anna Sergunina wanted to control the rate on some of her emergency fund.
Sergunina, a certified financial planner, knew a short-term CD would give her this opportunity.
“I just noticed the rate drop on my savings account and wanted to lock in a higher rate,” Sergunina says.
Rates on top-yielding savings accounts and money market accounts began decreasing in June of last year and continued to drop in response to the Federal Reserve lowering short-term interest rates three times in 2019. Savings yields may even fall a bit further with the Fed looking as if it will hold off on rate moves for the foreseeable future.
Unfortunately, you can’t go back in time and get a one-year CD at the yield that was being offered last July.Many top-yielding CD rates have since declined, but you can still lock in a short-term CD right now to get a fixed rate with the Fed appearing to be unlikely to raise rates in 2020.
Why you should consider a short-term CD
Trying to time CD annual percentage yields (APYs) probably isn’t worth it — or easy to get right. A year ago, when 2019 started, multiple rate increases were projected. Instead, the Fed reversed course and cut rates three times in 2019.
“I never assume that I can outthink the market,” Stockton says. “There’s just so much uncertainty in the world and my own personal perspective has always been if I try and outwit what the market’s going to do or where it is, maybe I’ll end up ahead and maybe I’ll end up behind.”
For instance, some people might have held out for higher CD rates a year ago — when rates were projected to rise. Instead, more than a year later, there have been multiple rate cuts for the first time in a decade.
Greg McBride, CFA, Bankrate chief financial analyst, says with the Federal Reserve on hold for the foreseeable future, CD investors will find the one-year term to be the sweet spot.
“The yield is higher than you’ll get on an online savings account or a six-month CD, but not much different from the yields available in multi-year maturities,” McBride says. “There’s no sense locking in for longer than one-year because you’re not getting a higher yield for doing so. The one-year CD provides the flexibility to reinvest 12 months from now when there might be better deals on other maturities.”
Generally, CDs offer a fixed APY for the term of the CD. You can still find one-year CDs paying more than 2 percent APYat some online banks. You can even find top-yielding CDs that require a low or no minimum deposit.
Keep the CD terms short, though. Some top five-year CDs currently offer around 2.25 percent APY, but the extra yield isn’t worth locking up your money beyond one to two years.
When a short-term CD makes sense
A short-term CD is a great place to earn a fixed APY on money you won’t need to access until after the term expires.
Most high-yield CDs charge early withdrawal penalties. If there is a chance you’ll need the money, stick to a savings account or money market account.
“My advice to consumers is always make a decision you’d be happy to live with no matter what happens,” Stockton says.
A no-penalty CD is also a potential option for those who might be avoiding CDs due to early withdrawal penalties.
Factors to consider when shopping for a CD
It pays to consider these important factors when searching for a CD:
- APY: The amount of interest that you’re going to earn is the top reason why you’re getting a CD. Make sure you compare CD rates to get a competitive yield. Getting a yield that’s more than 2 percent APY on a CD that’s for two years or shorter shouldn’t be difficult.
- Minimum opening deposit/balance requirement: Make sure the money you want to deposit in a CD aligns with the minimum balance requirements. There are options that offer both a low minimum balance requirement and a competitive APY.
- Purpose of the money: If this money is earmarked for buying a house in the near future, then a CD probably isn’t the right place for these funds. But if you’re not planning to spend the money within two years, a two-year CD — or a CD with a shorter term — may be the appropriate place for this cash to grow with a fixed APY. A CD also isn’t the best place for money that you will likely need in the short term.
- Early withdrawal penalties: Find out the CD’s early withdrawal penalty. Better yet, make sure you’re putting an amount in a CD that you’re unlikely to need during the CD term. If that means putting a little less in the CD — and putting a portion in a savings account instead — that’s a sound strategy.
Keep track of when your CD is going to mature so that you can evaluate whether the APY changed at the end of your term. Even if the rate increases, you could find a higher rate elsewhere. Shop around before committing.
Learn more:
- CD rates forecast: How much further yields could fall
- How much money should you keep in a CD?
- Here’s when an early withdrawal from a CD is worth it
FAQs
If you're planning to open a short-term CD soon, then it's likely a smart move, as it could earn you more interest than a longer-term CD would. "Currently short-term CDs have higher rates than long-term CDs," Jonathan Maula, owner of wealth management firm Castle Hill Capital in Virginia.
Why are short-term CDs paying more than long-term? ›
Short-term CDs have high interest rates right now — the best CDs offer over 5.00% APY. Short-term CD rates are more competitive than long-term ones because there's an inverted yield curve.
What is short-term CDs? ›
With a short-term CD, the duration is brief, such as three or six months, or up to a year long. During the CD's term, your deposited funds earn interest at a fixed rate that is usually higher than the interest rate you could get from a regular savings account.
Is it a good time to invest in CDs? ›
Are CDs worth it in 2024? CDs are worth it in 2024 for the right investor. After rate hikes in the past year and a half, many of the best CDs yield well over 5% but these rates may not last for long. For some, it could be worth it to lock in high rates before the Fed starts cutting rates later in the year.
Are 3 month CDs worth it? ›
Yes, a three-month CD can be worth it if you're looking for a safe, FDIC-insured account that earns guaranteed interest on money you'd otherwise leave untouched in a checking or savings account.
What are short-term CDs paying right now? ›
Compare the Best 6-Month CDs
| Institution | Rate (APY) | Term |
|---|
| Mills42 Federal Credit Union | 5.35% | 6 months |
| Rising Bank | 5.35% | 6 months |
| Home Savings Bank | 5.35% | 6 months |
| DR Bank | 5.35% | 9 months |
15 more rowsInflation isn't factored in with a locked APY
Whenever you invest in a CD, you lock in the interest rate for the term. If inflation rises during the term, your APY won't be adjusted, so an interest rate that once seemed stellar might be lackluster after accounting for inflation.
What is a downside of CDs? ›
Disadvantages of investing in CDs
The penalty ranges from a minimum of multiple months' worth of interest to more, depending on the bank and term of the CD. If you open a 12-month CD and need to withdraw the money before it reaches the maturity date, you might lose three months' worth of interest that you earned.
Why are my CDs losing money? ›
All investments carry some degree of risk, but CDs are as low-risk as they come. That said, inflation, early withdrawal penalties and interest rate fluctuations can all eat into your CD's value.
Is it better to invest in short-term or long term CDs? ›
Short-term CDs currently pay more, but longer-term maturities give you a guarantee of relatively high yields even if rates come down in the near term. Consider a plan, then, that takes advantage of various CD maturities, or pick one particular term that matches up with a specific spending need.
Unlike gains on stocks or bonds that have gained value, which are subject to capital gains taxes, certificates of deposits are not considered investment securities and gains are reported to the IRS on form 1099-INT as regular income.
Are short-term CDs better than long term? ›
Typically the longer the term, the higher the CD rate is. You can earn more interest than short-term CDs with terms longer than a year and up to three years. The national average rate for a three-year term is 1.41% APY, and you can find higher yields at some banks.
Why should you put $5000 in a 6 month CD now? ›
Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.
Are CDs safe if the market crashes? ›
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
Should I lock in a 5% CD now? ›
Remember, it's possible that in two or three years from now, CDs will be paying 2.5% interest at best. So if you can lock in a 5-year CD at 5% now, that means that once things reach that point, you'll continue to earn more interest on your money while savers opening new CDs will be signing up to earn much less.
Is it better to do short-term or long term CD? ›
Typically the longer the term, the higher the CD rate is. You can earn more interest than short-term CDs with terms longer than a year and up to three years. The national average rate for a three-year term is 1.41% APY, and you can find higher yields at some banks.
Is a 6 month CD worth it? ›
You can access your cash after six months without the risk of an early withdrawal penalty. You may get a higher interest rate than a traditional savings account. Some of the best six-month CDs offer rates that are significantly higher than savings accounts at traditional, brick-and-mortar banks and credit unions.
Is a 7 month CD worth it? ›
CDs are worth investing in for risk-averse investors who want to keep their money safe while maintaining more of its purchasing power. Although you have to lock your money away for a specific amount of time, the payout from a long-term CD can be enticing. For example, Quontic offers a 5.05% APY on their six-month CD.
How much will a $500 CD make in 5 years? ›
This CD will earn $117.15 on $500 over five years, which means your deposit will grow by 23.4%.
