Long-term or short-term CDs can protect your money from you.
Transferring cash from your savings account to your checking account often just takes a couple of clicks. Although this can come in handy when, say, your dishwasher gives out, regularly dipping into savings can hurt your financial goals.
With certificates of deposit at banks (called share certificates at credit unions), you commit to setting aside your cash for a set period of time. In return, you earn a better interest rate than with a regular savings account. Plus, the temptation to dip into that money is dampened by the penalty you’d incur with an early withdrawal.
The trick is finding the right balance between having your money accessible and letting it grow. CDs can be a great tool to help achieve overall savings goals, as long as you avoid early withdrawal fees and scout out the best rates. (Skip ahead to compare some of the top CD rates.)
Here’s what to keep in mind when choosing a CD term length.
Short-term CDs (fewer than 12 months)
Lower commitment, lower rates
Securing a CD with a high interest rate and avoiding early withdrawal fees should be your main priorities. Short-term CDs such as six-month or one-year terms can make both goals possible. Bank-issued three-month CDs come with an average annual percentage yield of 0.19%, but the best six-month CDs surpass 1.50% APY.
Careful shopping can unearth decent rates on CDs with terms of less than a year, with online institutions and credit unions uniformly providing the highest returns. But savings account rates at online banks, upward of 1.50% APY, might earn you just as much.
Still, if you’re simply looking to ensure that you won’t spend your money, a three- or six-month CD could be right for you. Knowing that you’d be penalized for withdrawing that money early might be exactly the motivation you need to leave it alone. (See more about CD early withdrawal penalties at about 20 banks.)
» Learn more about certificates of deposit by reading our CDs explainer.
Mid-range CDs (1-3 years)
Better rates, more discipline required
With a one-year CD, you’ll have to work a little harder to stay disciplined and not withdraw your funds prematurely. In exchange, you’ll receive a slightly better rate. The average APY for a one-year bank-issued CD is 0.48%. But again, some online-only banks and credit unions offer more, with one-year CD rates around 2%. And you can get rates of 2.05% or higher for three-year CDs.
Just be sure that you won’t need to access that cash. Having a separate emergency fund can help. This rainy-day fund should contain three to six months of living expenses. With that in place, you won’t be as tempted to dip into your CD.
Long-term CDs (4-5 years)
Best rates, if you can handle the commitment
If you’re handing over your money for up to five years, you’ll want a stellar rate in return. Once again, credit unions and online-only banks will be your best bet, with some offering long-term CD rates over 2.15%. Bank-issued five-year CDs, meanwhile, have an average rate of only 0.95%.
Keep an eye out for online-only banks and credit unions that don’t have minimum balance requirements. That way, you won’t be forced to put away more money than you can afford. And if you’re putting away money for up to five years, you might want to consider investing in a “bump-up CD,” a special type of certificate that lets customers take advantage of rising rates in the market.
Build a CD ladder
How to bridge the gap
Many savers may want the higher rates of a three- to five-year term but are wary of tying up their money for such a long time. CD ladders help to address this issue. The process is fairly simple: Instead of putting, say, $10,000 into a five-year CD, put $2,000 each into a one-, two-, three-, four- and five-year CD. You can use our CD tool to find varying term lengths and rates. As each CD matures, reinvest the money in a new five-year CD, and before long you’ll have one five-year CD maturing each year. This way, you enjoy the highest possible interest rates but still have some of the funds available in the short term.
Before committing to a long-term CD or laddering, however, make sure you don’t have too much of your money in deposit accounts. If you have plenty of cash for daily needs plus a robust emergency fund, consider an online brokerage account. These financial products come with more risk; unlike CDs, they’re not insured by the Federal Deposit Insurance Corp. But they can lead to better returns. For guidance, check out NerdWallet’s online stock brokers for beginners.
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