Why a long-term CD is better than a short-term one now
Inflation is dropping, and interest rates may not be far behind. That was the implication earlier this month in a report showing inflation growing at the slowest pace in two years. Following the report, the Federal Reserve kept interest rates unchanged at a 5% to 5.25% range. That followed 10 rate hikes dating back to March 2022. In this environment, millions are wondering if interest rates may have peaked or if a decrease is on the horizon for later this year.
With this context in mind, savers may want to take a closer look at where they're keeping their money. High-yield savings and certificates of deposit (CD) both currently offer exponentially higher interest rates than regular accounts, particularly if they're opened with an online bank or credit union. That said, not every savings account and CD is equally beneficial. While short-term CDs may have been advantageous in recent months, there's a compelling case to be made for opening a long-term CD now, instead.
Start by exploring your CD options here now to see how much more you could be earning.
Why a long-term CD is better than a short-term one now
Here are three reasons a long-term CD may be better than a short-term one in today's economy.
Rates could stay steady (or drop)
The hope following last week's Fed announcement is that the worst is over and rates will stay steady before dropping. If either prediction comes true, it may make sense to lock in long-term CD now while rates are still high and returns will be as high as possible.
That's because CD terms are locked, regardless of any activity in the larger rate environment. If you can lock in a long-term CD now, you could earn an APY of 4.00% or higher. While that may not be as high as what you can get with a short-term CD, it will still be comparable - and will ultimately let you earn more over the long term than you could get with a CD that expires in a few months.
Lock in a long-term CD here now and start earning more interest on your savings.
It will protect your money for the long haul
It may be tempting to withdraw your money from a high-yield savings account or to up the interest you've made on a short-term CD as soon as it's expired. But a long-term CD won't be subject to the same temptations. By putting your money into this type of savings vehicle, you can safely grow it for use at a later date - and avoid the cycle of withdrawals and deposits that some of your other accounts may be used to.
You're less likely to pay penalties
If you're comfortable locking away your money in a long-term CD, chances are good you won't need that money immediately. Because of this, you're less likely to pay a penalty for an early withdrawal.
Long-term CDs are better for savers with plans for the distant future, like saving for your child's college education, versus a need to access the funds later in the same year. If you can put your money in a long-term CD and have a "set it and forget it" approach to these funds, a long-term CD may be better for you than a short-term one, especially if rates on the latter drop soon.
One other consideration
No one knows where the rate environment is heading over the next few months and years. It's possible that interest rates have peaked, but it's also possible they could rise again. If you're concerned about opening a long-term CD should rates head upward, consider laddering multiple accounts. This is when you open various CDs, both short- and long-term, with different expiration dates. By doing, so you'll have greater access to your money and more flexibility to open accounts at higher rates in the future.
Learn more about your long-term CD options here now.
