Short-Term vs. Long-Term CDs: Which Is Best for You?

What Is a Short-Term CD?

Short-term CDs are CDs with terms ranging from one to 12 months, so your money will be locked away for a relatively short amount of time. That's why this type of CD can make sense if you're saving for a near-term goal. But like other CDs, short-term CDs may charge fees if you withdraw money before the CD matures.

CDs with shorter terms usually have lower annual percentage yields (APYs) than long-term CDs, but that may not be the case when the federal funds rate is on the decline. This benchmark rate, which is set by the Federal Reserve, largely influences rates on CDs, savings accounts and money market accounts. When this rate drops, CD rates tend to do the same. (The opposite also tends to be true.) If banks anticipate future rate cuts, they may be hesitant to commit to higher rates on long-term CDs.

Banks may also offer promotional rates on short-term CDs as a way of encouraging new or existing customers to open CD accounts.

Pros and Cons of Short-Term CDs

Before opening a short-term CD, be sure to understand the potential benefits and drawbacks. Also consider your short- and long-term financial goals to decide if this type of account makes sense.

What Is a Long-Term CD?

Long-term CDs generally refer to CDs with terms that last three years or longer. Some have terms as long as 10 years. That might translate to a higher APY, which can add up over time. This is why a long-term CD could be a great way to grow your savings, assuming you don't need the money right away. And like most short-term CDs, your account will likely be insured for up to $250,000 per depositor and bank.

Pros and Cons of Long-Term CDs

Like any savings account or CD, long-term CDs have unique pros and cons to consider. Here are some important things to keep in mind.

Short-Term vs. Long-Term CDs

As the names imply, the main difference between a short- and long-term CD is the length of the maturity period. A shorter term means that the CD will mature faster—and if interest rates are declining, you could secure an attractive APY. You also won't have to wait as long to access your money since term lengths generally last 12 months or less.

Long-term CDs, on the other hand, are geared toward savers who have a longer timeline. For example, if you plan on buying a home a few years from now, you might put a lump sum into a 3-year CD, then let compound interest work its magic until you're ready to make a down payment.

How to Choose the Right CD Term for You

Your goals and financial situation will ultimately determine which type of CD is right for you. Begin by asking yourself what you're saving for and what your timeline is. From there, you can choose a CD term that best supports that.

Also remember that you don't necessarily have to choose one option. Setting up a CD ladder could help you maximize the benefits of both short- and long-term CDs. This involves splitting your savings between multiple CDs that have different maturity terms.

Example: If you have $5,000, you could put $1,000 into five different CDs that mature in three months, six months, 12 months, 18 months and 24 months. As each term ends, you'll receive a wave of cash that you can either reinvest or put toward your financial goals.

When to Consider Choosing a Short-Term CD

A short-term CD might be the best option if:

• You're saving for a near-term goal. Let's say you get a new job and have some cash set aside to relocate in three months. A short-term CD could be a place to park that money until it's time to make the move.
• You want greater liquidity. You might be hesitant to lock your money into a long-term CD. With a short-term CD, you won't lose access to your funds for quite so long.
• You've found a better rate. After shopping around and comparing different CDs, you may find that short-term CDs offer the highest yields. That may be the case right now, as CD rates are expected to drop in 2026.

When to Consider Choosing a Long-Term CD

In certain situations, a long-term CD might be a better fit. That may be true if:

• You won't need the cash for a while. If you're saving for something that isn't in the immediate future, a long-term CD could be a great place to earn interest while you wait. Just keep in mind that you typically cannot contribute more than the initial deposit.
• Interest rates are climbing. When this happens, yields on long-term CDs tend to outperform short-term CDs.
• You want a low-maintenance investment. Short-term CDs expire faster. As each one matures, you'll have to decide whether to reinvest your money or spend it elsewhere. With a long-term CD, you won't have to deal with that responsibility as often.

Alternatives to CDs

You might decide that a CD isn't the best option for you right now. In that case, consider these alternatives:

• High-yield savings accounts: A high-yield savings account can get you a better APY than a traditional savings account—and allow you to access your money without worrying about an early withdrawal fee. These accounts typically have low minimum deposit requirements, though bank fees may apply.
• Money market accounts: Most money market accounts offer competitive interest rates and also come with debit cards or checkbooks to allow for easy transactions. That can include paying bills or making ATM withdrawals.
• Bonds: Available from the federal government, local municipalities and corporations, bonds offer another low-risk way to invest. When you purchase a bond, the bond issuer is obligated to repay you with interest. But be prepared for modest gains. Higher-risk investments like stocks typically generate stronger returns.

Frequently Asked Questions

The Bottom Line

When choosing between short-term versus long-term CDs, consider your goals. For money you need to use in the near future, short-term CDs are likely the better choice. Long-term CDs could be a good alternative for cash you don't plan to touch for a while—but be sure to compare rates because CDs with the longest terms aren't always the ones that offer the best APYs. Another option is opening multiple CDs to enjoy the benefits of different term lengths.