Picking the Best CD for You: Short-Term vs. Long-Term

When it comes to saving money, certificates of deposit (CDs) often pop up as a solid option. CDs are time deposits offered by banks with fixed interest rates and maturity dates. In other words, you agree to leave your money in the savings account for a specific period in exchange for a guaranteed return. But the million-dollar question is, should you choose a short-term or a long-term CD? Let's break things down to help you decide.

To revisit the basics of CDs, read our previous article What is a Certificate of Deposit and How Does It Work? Now let’s get back to comparing short-term and long-term CDs!

Interest Rates: How Much You Will Earn

• Short-Term CDs — They typically offer lower interest rates compared to their long-term counterparts. For example, you might find a 6-month CD interest rate of 1.6% APY.
• Long-Term CDs — These accounts generally offer higher interest rates. For instance, a 5-year CD might boast an interest rate of 3.5% APY or even higher. Recently, Academy Bank offered a 15-month CD with a 5.15% APY (Annual Percentage Yield). That's not pocket change!

Key Takeaway on Interest Rates — If your primary goal is to maximize the return on your investment, long-term CDs usually give you the upper hand with higher interest rates. However, keep in mind that these rates also depend on the Federal Reserve's policies, and exceptions could exist if your financial institution offers a special promotion.

Want to learn how to calculate interest on a CD? A certificate of deposit calculator might help!

Time Commitment: Duration of Your Investment

• Short-Term CDs — A great option if you want your money back soon. We're talking anywhere from 3 months to a year. This makes them ideal for upcoming savings goals, like a vacation or an upcoming expense.
• Long-Term CDs — These require a bigger commitment. The time investment can range from 2 years to up to 5 years. They are perfect for long-lasting goals like retirement or a down payment on a house.

Key Takeaway on Time Commitment — Choose a short-term CD if you need flexibility and access to your funds in the near future. Opt for long-term CDs if you can afford to lock away your money for several years.

Early Withdrawal Penalties: If You Need Your Money Early

• Short-Term CDs — Generally, short-term CDs have lower penalties for early withdrawal, but it still can sting. The penalties can be a few months' worth of interest.
• Long-Term CDs — These accounts hit harder with penalties. Some banks might charge up to 2 years of interest or more if you decide to pull out your money early.

Key Takeaway on Withdrawal Penalties— If there's a chance you might need to access your funds sooner than planned, short-term CDs might offer a softer penalty for early withdrawal.

Growth Potential: Maximizing Your Money

• Short-Term CDs — They typically offer less time for your money to grow. Interest is usually compounded quarterly, but the shorter term means less overall growth.
• Long-Term CDs — This option benefits from compound interest over a more extended period of time. If you're in it for the long haul, the growth can be substantial.

Key Takeaway on Growth Potential — For those who can afford to wait, long-term CDs provide the best opportunity for significant growth (due to the power of compound interest). However, in the same way that interest rates are affected, your growth potential can also vary based on specific bank promotions, which can occasionally make short-term CDs more attractive.

Financial Goals: What You Are Saving For

Short-Term CDs are best for:

• Emergency funds
• Saving for an event or purchase within the next year
• Flexible savings goals

Long-Term CDs are best for:

• Retirement savings
• Long-term investments
• Goals that are several years away, like education funds or major purchases

Key Takeaway on Financial Goals — Align your CD choice with your savings objectives. Short-term CDs offer flexibility and quicker access, while long-term CDs are ideal for major, long-term goals.

Should I Open a Short-Term CD or a Long-Term CD?

Wondering how to choose the best CD? Deciding between a short-term and a long-term CD ultimately depends on your financial goals and circumstances. Short-term CDs offer flexibility and quicker access to your money, making them ideal for your savings goals that are just around the corner. Long-term CDs provide higher returns and stability, perfect for investments in the distant future.

And if you are looking for a reliable place to start, consider exploring the Academy Bank’s best CD options. We offer a competitive 5.15% APY* (Annual Percentage Yield) for 15-month CDs, making it a great option for both short-term and long-term financial goals.

Open a certificate of deposit with Academy Bank and watch your investments grow!

 

 

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* Annual Percentage Yield. $500 minimum opening deposit required. A penalty may be imposed for early withdrawal. The Annual Percentage Yield (APY) is accurate as of 07/15/24. CD rates are subject to change at any time and are not guaranteed until CD is opened. Fees charged to the account could reduce earnings on the account.