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MoneyWatch: Managing Your Money
By Kelly Ernst
Edited By Kendall Little
/ CBS News
If you're looking for a low-risk investment with guaranteed returns, a certificate of deposit (CD) might be a great option for you. CDs are safe, reliable and offer higher returns than traditional savings accounts (and even some high-yield ones).
However, not all CDs are created equal. One key factor to consider before you open an account is the CD term, or the length of time you agree to keep your money in the account. Short-term CDs typically have terms of three to six months and up to a year, while long-term CDs can be up to five years or more.
It's important to choose the right CD term to ensure you're getting the most out of your investment — and there are a few key details you can consider to help decide.
See today's top CD rates to begin exploring your options.
How to choose a CD term, according to experts
Here's what the pros recommend keeping in mind when choosing a CD term.
Identify your savings goal
The first step in choosing the right CD term is to consider your savings goal. Do you need a set amount of money by a specific date? Is that date in the near future or many years down the road? Knowing your savings objective will help you determine the length of the CD term you should choose.
For instance, if you're saving for a down payment on a home or a wedding, a short-term CD may be the right choice. On the other hand, if you're saving for retirement, a long-term CD might be a better option.
"If a saver has a particular savings goal, they likely want to select a CD term that matches when the expense will occur," says Tim Melia, CFP, MBA, financial planner at Embolden Financial Planning. "If they have a goal in three months, they will want a three-month CD. Likely, a saver does not want a longer term than the targeted expense, as there may be fees or penalties for selling the CD prior to the end of the term."
Check out current CD offerings to find one that's right for you.
Consider early withdrawal penalties
As Melia mentions, withdrawing your money from a CD before the end of the term can result in penalties, which may negate any interest earned.
"Your CD terms should match or at least not exceed your timeframe for needing the funds," says Joe Marques, CFP, wealth advisor and co-CEO of Bolin Creek Wealth Advisors. "Yes, you can always break the CD by paying the penalty, but the penalty will eat into your interest earned and could even eat away at some of your CD principal."
That said, Marques adds, "If you have some flexibility as to when you'll need the money, it can be helpful to look at how increasing the term increases your rate. So if a six-month CD is yielding 4.5% and you can get 5% by stretching the term to a year, and you won't need the money for one year, then it's worth extending your term."
Start your CD search here to find out how much you could be earning.
Compare CD rates
Generally, longer-term CDs offer higher interest rates than short-term ones. However, rates can vary across banks and credit unions, so take the time to compare.
"Just because a term is longer than another doesn't necessarily mean that it will provide a higher interest rate or vice versa," says Greg Goff, CFP, founder and financial planner at Sound Wealth Management. "You might find that you could earn a higher interest rate in a shorter term."
In fact, many of today's best rates are offered on one-year CD terms. While that's not always the case, choosing a shorter term right now could offer big benefits. You can easily compare CD rates here.
The bottom line
In an investment marketplace that offers a myriad of options and account types, choosing the right CD term may seem overwhelming. But it doesn't have to be. By carefully considering your financial goals, being mindful or early withdrawal penalties and comparing current CD rates, you can choose the term that's right for you. When in doubt, meeting with a financial advisor online or in person can help you weigh your options.
