Will a short-term or long-term CD be better for 2025?
Before this fall, certificate of deposit (CD) accounts were a clear choice for savers. These accounts came with interest rates many times higher than traditional savings accounts. And those high rates were fixed, meaning that the saver would earn the same rate until CD maturity – regardless of any reductions in the broader rate climate. With inflation problematic and borrowing costs elevated, these unique savings vehicles became an obvious choice.
But the economy has shifted again, particularly in recent months. Inflation is approaching the Federal Reserve's target 2% goal and, accordingly, the Fed has issued two cuts to its federal funds rate: one in September and another in November. A third appears likely for the Fed's final 2024 meeting later this month.
Against this new backdrop, savers may be contemplating the worth of CD accounts, especially when determining if a short-term (which matures in less than 12 months) or a long-term account (which matures in over 12 months) is optimal heading into 2025. Fortunately, for most savers, there's a clear answer to this question. Below, we'll break down what to know.
See how much more you could be earning on your money with a high-rate CD here.
Will a short-term or long-term CD be better for 2025?
While each saver's financial situation is different, there's a clear and strong argument to be made for opening a long-term CD instead of a short-term one for 2025. Here's why it could be the better move:
Long-term CD rates are competitive
Are long-term CD interest rates quite as high as short-term ones right now? They're not. But they're still competitive and likely closer to short-term CDs than you may have thought. You can lock in a 4.50% rate on a 6-month CD now or 4.42% on a 1-year CD if you shop around. But rates on long-term accounts aren't materially lower. 18-month CDs can be found at 4.20% while 2-year CDs are around the same. Simply ask yourself: Do you want to earn a slightly higher rate for just a few months or do you want to earn a similar one for years to come? If you choose the latter, a long-term CD will be better for you in 2025.
Get started with a CD here now.
Long-term CDs will protect you against rate volatility
The Federal Reserve doesn't directly impact CD interest rates, but a decline in the federal funds rate will inevitably influence what banks are willing to offer savers. And with additional reductions likely for both this month and into the first quarter of 2025, it makes sense to protect yourself against this rate volatility with a long-term CD. The key here is to avoid making a larger deposit than you can comfortably afford to part with for the full CD term. If you do, you could risk having to pay an early withdrawal penalty to regain access to your funds. So, first, calculate the amount you can easily deposit. Then find a long-term account with the highest rate (online banks are typically the most competitive).
You can potentially earn more money
Before opening a CD, it's important to calculate your potential earnings. And thanks to the fixed interest rates that CDs come with, this is easy to do with certainty. When you do so, you can see the higher-interest earning potential with a long-term CD. A $5,000 deposit into a 6-month CD at the aforementioned 4.50% rate results in a minimal $111.50 earned upon account maturity. But that same deposit in the 2-year CD at 4.20% ends in a $428.82 return. That's a return almost four times higher than the 6-month option, with the same initial deposit amount. So, first, calculate the earnings. You may be surprised at how much more you could earn with the longer-term account, even at a slightly lower interest rate.
The bottom line
In some instances (like when you don't want to lock up your money for an extended period), a short-term CD may be preferable. But, now, going into 2025 and an unpredictable rate climate, many would benefit from a long-term CD instead. These accounts have rates competitive with the best short-term CDs and they'll protect savers from future rate volatility, all while likely earning them more money than they otherwise would have made with the shorter alternatives. Still, the benefits of a CD will only be obtained if you can afford to keep your money in the account until it matures. So first weigh your deposit amount before getting started, regardless of which term length you ultimately decide to open.
