CD Lengths–Which are best? If you plan on investing in a Certificate of Deposit, then one of the most important decision you will face is which cd length term you want. While the CD length may not seem like an important decision, it can have a big impact on your interest earnings.
CD Lengths: Why Its Important to Select the Proper Length When Investing
It is important to select the proper length when investing in a CD because it is often difficult to change lengths or terms once your account has been opened. In fact, should you choose to withdraw your earnings early, you could incur a penalty on interest earnings. On the other hand, if you choose a length that is too long, then you could be tying up funds that you could be using to invest in other investment ventures.
Advantages of Investing in a Short Term CD:
- Funds will only be “tied up” in the CD investment for a short time
- If the market interest rates increase (or you find a better offer), then you can re-invest in a high yield cd after the short term is over
- Less likely to face a penalty for early withdraw, since the funds are only invested for a limited time
- Can be a great way to earn interest safely and securely in the short term
Disadvantages of Investing in a Short Term CD:
- Interest rates are often lower for shorter lengths, which means you will earn less income from the investment
- If the market crashed during the short term, you would lose the higher interest rate you originally had when you renew or reinvest in a new cd (should the banks lower cd rates within that time)
- Financial institutions may not offer “perks” for the CD terms, such as a “bump up” cd rate, etc.
Advantages of Investing in a Long Term CD:
- It is much easier to find high cd rates for longer terms
- CD terms may offer more favorable conditions, such as “bump up” features, more frequent compounding of interest, etc.
- You can earn more interest income in the long run, should the market rates lower significantly after you have “locked-in” your rate. In other words, if you get a CD at 5% interest for a 5 year period, and then the market soon went into recession, then you could enjoy 5% safe earnings while the current rates may fall as low as 1-2%.
Disadvantages of Investing in a Long Term CD:
- Funds will be unavailable for the entire length of the long term CD (unless you withdraw funds early, which could lead to a penalty).
- You could lose money long term if you invest at a time when the rates are low, and then they raise significantly during the course of your investment. The only exception is if you can bump up your rate, which will reduce the loss of interest income.
- If you select a CD that doesn’t offer interest payments (often as a form of dividends), then you will not be able to receive the income generated from the CD until maturity.
There are clearly advantages and disadvantages for investing in shorter length CDs as opposed to longer length CDs. Each investor must guage the current market rates, the economic outlook, inflation, and other factors when choosing the CD length that is best for their own financial situation. This decision shouldn’t be taken lightly.
Common CD Length Terms:
There are many different lengths of CD terms available. Here are some common ones:
- 1 month CD
- 3 month CD
- 6 month CD
- 9 month CD
- 12 month (1 year) CD
- 18 month CD
- 24 month CD (2 years)
- 30 month CD
- 3 year CD
- 4 year CD
- 5 year CD
- 7 year CD
- 10 year CD