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Choosing the right CD term: What's the ideal timeline for locking in your money?

CD terms range from a few months to a few years. So is there a sweet spot?

Yahoo Personal Finance· Getty Images
Updated 6 min read

Certificates of deposit (CDs) earn a fixed interest rate for a set period of time, known as the term. CD terms range from one month to a decade or longer. With so many options, it can be hard to know what the ideal term length for a CD is.

Choosing CD terms involves knowing your savings goals and timelines, understanding how interest rates are trending, and more. While there’s no one ideal CD term length, considering these factors can help you choose the best term for your situation.

A CD’s term is the amount of time the CD is open and earning compound interest. When you open a CD, you choose a term, fund the account, and leave it alone. During the term, you typically can’t touch your principal deposit without an early withdrawal penalty (no-penalty CDs are the exception). At the end of the term, the CD reaches maturity, and you can access your money.

CD terms can vary quite a bit. Typical terms range from three months to five years, but some banks and credit unions offer terms as short as one month or terms as long as 10 or more years. Three-month, six-month, one-year, two-year, three-year, four-year, and five-year terms are relatively common.

Read more: What to do with a CD when it matures

There isn’t an ideal CD term for every situation. The following considerations can help you decide which CD term to choose.

CD interest rates vary by term. Historically, longer CD terms offer higher interest rates in exchange for a longer time commitment since banks often rely on customer deposits for revenue-generating activities.

However, in a high interest rate environment, the opposite may be true; banks may not want to guarantee higher rates for a long period of time if they think rates will drop in the near future. Regardless, you may want to consider which terms are offering the best rates when you’re shopping for a CD. If you have flexibility, you may want to take advantage of the terms that are paying the most.

Read more: The best CD rates on the market today

You should also consider the amount of time you have to save up for your goal. Some savings goals have specific timelines, while others have flexible timelines. For example, if you’ve booked a venue to get married on a date six months away, that’s a specific savings timeline. On the other hand, if you’re saving to buy a house at some point in the next few years, you have a more flexible timeline.

You don’t need an exact timeline to choose a CD term, but you do need a general idea. That way, you can make sure to choose a CD that matures before you need access to your cash.

Generally, the money you deposit into a CD isn’t accessible until maturity. This means that throughout your CD’s term, you can’t touch your money without paying an early withdrawal penalty. Determining how long you can go without accessing your funds can help you choose the right CD term.

For example, if you’re setting aside money for an emergency fund, you need to be able to easily access the funds at any time. In that case, a high-yield savings account would probably make more sense. But if you know you won’t need to access this portion of your savings for at least five years, you can confidently choose a longer-term CD.

When you open and fund a CD, you know how much interest you’ll earn since the rate is guaranteed for the full term. If rates drop during your CD’s term, this fixed rate is an advantage. But if interest rates rise, your CD will continue earning the lower rate until maturity.

It’s not always possible to predict future interest rate changes. But having a general idea of what’s likely to happen can help you decide whether it’s a good time to lock in a rate for a long period of time or stick to a shorter term.

Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards

Inflation is the rise in prices of goods and services over time. When inflation rises above your CD’s interest rate, the money in your account won’t keep pace, and it’ll lose purchasing power over time. On the other hand, if your CD’s interest rate exceeds the rate of inflation, you’ll be in a better financial position when that CD matures.

Locking in a long-term CD with a competitive interest rate before inflation slows can help you outpace inflation over several years. But if inflation is expected to rise, locking in a long-term CD could be risky if the inflation rate exceeds your interest rate.

Like interest rates, you may not know what’s going to happen with inflation. But knowing what experts predict can help you choose a CD term.

Read more: How to protect your savings against inflation

Choosing a CD term can be difficult, but a CD ladder can help you take advantage of several CD terms at once.

A CD ladder is a savings strategy that uses multiple CDs of varying terms to give you revolving access to a portion of your savings. It also lets you take advantage of the highest interest rates, regardless of whether they’re currently being offered for a short or long term.

To create a CD ladder, start by opening multiple CDs with staggered maturity dates. For example, you might open a one-year CD, a two-year CD, a three-year CD, and a four-year CD.

When your first CD matures, you can either withdraw your proceeds or reinvest them into a new CD. As each subsequent CD matures, you’ll do the same, either withdrawing or reinvesting your cash, depending on your current financial priorities. This strategy helps you plan for the long term and short term, giving you plenty of flexibility to reinvest cash into the appropriate term on a regular basis.

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Your savings goals and priorities should determine how long you keep money in a CD. If you know you’ll need to access your money by a certain date, plan your CD term so it matures before that date. If you have more flexibility with your savings timeline and won’t need to access the money anytime soon, you can choose a CD term based on other factors, such as interest rates or inflation predictions.

There is no best term for CDs because it depends on your situation. However, interest rates typically vary by term, and there may be one term that offers a higher interest rate. Often, longer-term CDs have better interest rates. But when interest rates are high and expected to drop, you may find better rates on shorter terms. Don’t let interest rates be the sole driver when choosing a CD term, though. Your financial priorities, timelines, and goals will also help you choose the best CD term.

As of the time of this writing, you can find CDs with competitive rates exceeding 5.00% APY — well above what you could find even a couple of years ago. But CD rates aren’t the only thing to consider when deciding if it’s worth it to invest in a CD. You should also figure out if you can afford to put money away for a set period of time without touching it.