Should I use a short- or long-term certificate of deposit right now?

If you've got a bit of cash you don't see yourself needing to use for a bit, a certificate of deposit (CD) can be an excellent way to keep your money safe and earn solid interest. A CD is an interest-bearing account that offers a fixed rate of interest for agreeing to keep your money deposited for the full CD term. 

What that means is that even if the rates offered by your bank decline significantly during the CD's term, you'll still earn a consistent interest based on the rate you were given when you opened the account. The tradeoff is that you cannot access the money during the term without paying a price, as withdrawing your money from a CD before it matures generally comes with steep early withdrawal penalties. 

CDs are offered with terms ranging from one month to 10 years on average. CDs with terms of less than one year or less are considered short-term, while the rest are considered long-term. But which type is best for you? Let's find out.

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Should I use a short- or long-term CD right now?

There are pros and cons to both short- and long-term CDs. Determining which option is right for you largely depends on your unique circumstances and what you want from your investment. 

The case for short-term CDs

The biggest reason to consider a short-term CD is get quicker access to your money. Remember, there are generally penalties for taking money out of a CD before the term is up. If you don't think you can go more than a year without needing access to the money you are working with, a short-term CD probably makes the most sense.

Another benefit of short-term CDs is that the rates are generally higher than long-term CDs right now. In a typical rate environment, long-term CDs will typically offer higher rates than short-term CDs to encourage savers to leave their money deposited for longer. 

However, rates for all CDs have been elevated recently in response to the Federal Reserve raising the federal funds rate multiple times over the last couple of years. While the Fed does not set the rates for consumer products like CDs, rates offered by banks generally track alongside the federal funds rate. With rates elevated, many banks are offering higher rates for short-term products, where rates aren't locked in for as long.

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The case for long-term CDs

The main reason to use a long-term CD is that the compounding interest will result in bigger earnings during the CD term. It isn't just the money you deposit that earns interest – you also earn interest on the interest you've already accrued. And, depending on how often your account compounds, this could end up making for significant interest earned. 

While rates for short-term CDs are often higher right now, rates for long-term products are also high. That might change soon, though, as the Fed has indicated rate cuts may be coming in 2024. This makes long-term CDs even more appealing right now, as you'll lock in your interest rate even if the overall rate environment declines.

The case for a mix of CD terms

It might benefit you to split your money between multiple CD terms right now instead. That way, if you need it, you will have access to the money when the shorter-term CDs mature, while some of your money will continue to earn more compounding interest over time.

One option to maximize your returns is to build a CD ladder. With that strategy, you put money into CDs with different term lengths. As each CD account matures, you can access the money deposited in the account if you need it. If you don't need to use the cash, you can open a new CD with the money, essentially adding another "rung" to the ladder.

The bottom line

Certificates of deposit can be a great way to earn interest and keep your money safe and secure. There are benefits to both short- and long-term CDs, so make sure you weigh your situation before you decide which type makes the most sense. It also may be worth using a mix of CD terms to get the benefits of each.