What Length of CD Should You Pick?

Too often, people answer the question of which length of certificate of deposit is best, by asking which one offers the highest yield.

There are wide variety of CD maturity rates available from almost every bank and credit union.

Typical CD lengths (also known as maturities) include 21 days, 1 month, 3 months, 6 month, 7 months, 9 months, 1 year, 2 year, 3 year, 5 year, and 10 years.

The next consideration after the length of CD you choose, is yield. The rule of thumb is the longer the term of the Certificate of Deposit, the better the interest rate and yield.

Why wouldn’t you pick the highest yield?

Yield should be one factor in picking the maturity date of a certificate of deposit, but not the only one.   At many banks if you picked the highest yield, you would end up with a CD with a ten year or longer term. While this might provide the highest return compared to other options today, it might not be the best investment option, even if you don’t need the money for 10 years.

The reason this is true is because CD interest rates change over time, and over a period measured in years, the difference can be dramatic.  With this in mind, if you always choose the longer term CD, you forgo the opportunity to lock in a higher interest rate, should rates change in your favor.

Today’s interest rate environment is a great example of this.  Less than fives years ago, you might have been able to find a five year CD which yielded 6%, versus the 2% which is available today. The reverse could also be true however,  as interest rates could go down instead of up.

Here’s a list of current yields and maturities. Take a look and then continue below to learn why short term CD’s don’t often make sense.

How do you measure the trade off between extra immediate yield, and future opportunity?

To answer this question, requires some math, and an opinion of where interest rates are going. In short, its a topic for another article. However, given that difference in rates between shorter term CDs (1 and 2 year) and longer term CDs (year) is around 1%, it would not take much of a change in rate to make shorter-term CDs a better investment. If overall CD rate moved only a 0.5% higher during the next two years, the shorter term CD might be the better initial investment choice.

Why Short Term CD’s Normally do not Make Sense

Unless you are dealing with really large sums of money (like over $1,000,000), putting your money into a CD with a less than a 6 month duration will probably not get you more yield than you would earn on a savings account. In fact, on the day this article was written, the national average interest rate for a $25,000 savings account is point 0.01% HIGHER than the national average for a 6 month CD. While this not a not a normal situation, the amount of extra return from a short-term CD is usually not significant.