Which CD term is the best? This expert says it depends

A few last year CNET Money Experts managed to snare certificates of deposit with interest rates above 6%. Since the Federal Reserve interest rate reduction in September, CD savings rates were the same slowly decreasing. If you have money that comes from a CD or extra savings on which you want to earn interest is a long-term CD worth squeezing now?

The answer depends on your savings goals. Here are the CD rates right now and the recommended rates, and where one of our money experts is moving her money now that her CDs are maturing.

Long-term CDs don’t pay the best rates right now

In a typical inflation environment, long-term CDs (those with a term of more than one year) have a higher annual return than shorter-term CDs. For example, five-year CDs typically have the highest interest rates. Banks tend to pay more interest if savers agree to hold their money for several years.

When inflation is high – just like in recent years – interest rates tend to rise. While banks increase interest rates on savings products such as CDs, they typically increase interest rates on short-term CDs (although with a term of one year or less) to attract customers. Long-term interest rates on CDs are also going up; they tend to remain lower than short-term options, an anomaly known as the inverted yield curve. Financial institutions do not want to commit to paying top interest rates in the coming years, because they suspect that interest rates may soon fall.

As inflation begins to normalize, we’re seeing savings rates drop, but short-term CDs still offer higher APYs than long-term options. The highest short-term CD, based on the banks CNET tracks, offers 4.75%, while the highest long-term CD pays 4%.

That doesn’t mean you shouldn’t commit to a CD for the long term.

Read more: My CD is about to mature. What should I do in the current bearish environment?

Short-term CD rates are still worth it

With the Fed cutting rates, savers will see interest rates fall, he said Bernadette Joya CNET Money expert and founder of Crush your money goals. She recently compared CD rates herself.

Joy had two CDs that expired in August: one Term of 11 months with a 6.25% and a 10-month version with an APY of 5.3%. In less than a year, rates have dropped and she couldn’t find anything close to her current CD rates. She still plans to use CDs to make her money back. She decided to transfer the money to a money market account because the interest rate was higher than that of a CD. The account gives her more flexibility to withdraw money as she thinks about it buy a house.

Short or long term CD: which one should you choose?

Compared to last year, CD rates are lower for all terms. Some experts recommend locking up your money in a long-term CD for a guaranteed return over a few years, while others recommend sticking with short-term CDs so you can access your money sooner. It’s best to be strategic and keep your options open.

“It’s critical to stay proactive by exploring higher-yield options now, such as CDs or high-yield savings accounts, to ensure your money continues to work for you once you have cash set aside,” says Joy.

Tip: Before you commit money to a CD, make sure you have savings set aside in a CD emergency fund. Joy also recommends using any extra money to pay off credit account balances before considering a CD. “I personally coach too many people who hoard money AND hold on to debt,” she said.

If you have savings that you know you won’t need, committing to a long-term CD before interest rates drop further can be a smart move because you’ll have a fixed interest rate for years to come if the interest rates fall further. Now if you choose a short-term CD, such as a six months or one year If rates drop now, you may not be able to find an equal or higher rate at the end of your term as rates have peaked for most banks.

The golden mean: build a CD ladder

If you’re worried about tying up your money for too long or think there’s a chance that high interest rates will stick around for longer, spread your savings over a CD ladder. Basically, you open different CDs with different terms so that you regularly have money available to reinvest in a CD or other savings vehicle, depending on your goals. For example, instead of investing $5,000 in a single CD, you can invest $1,000 in five different CDs with maturity dates ranging from one to five years. Doing so can help you secure a higher interest rate while also keeping your savings more liquid because you’re putting some of the money into short-term CDs.

Keep in mind that most CDs have an early withdrawal penalty, even if you are building a CD ladder. A savings account with high returns not. Even if the interest on your savings account drops, you will still have quick access if you need the money urgently.

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