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

Last year, a few CNET Money experts they were able to hang on deposit certificates with interest rates above 6%. From the Federal Reserve rate reduction in September, CD savings rates were slowly decreasing. If you have money owed on a CD or extra SAVINGS seek to earn interest, is a Long term CD is it worth collecting now?

The answer depends on your savings goals. Here’s where CD rates are now and rate tips, 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 maturities longer than one year — have higher annual percentage returns than shorter-term CDs. Five-year CDs, for example, typically have the highest interest rates. Banks tend to pay more interest when savers agree to let them keep their money for several years.

When inflation is high — as it has been in recent years — interest rates tend to rise. As banks raise interest rates on savings products like CDs, they typically raise rates on short-term CDs (albeit with terms of one year or less) to attract customers. Long-term CD interest rates also rise, tending to stay lower than short-term options, an anomaly known as an inverted yield curve. Financial institutions do not want to commit to paying maximum interest rates for several years because they suspect that interest rates may soon fall.

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

That doesn’t mean you shouldn’t lock a CD long-term.

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

Short-term CD rates are still worth it

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

Joy had two CDs that matured in August — year term of 11 months with a 6.25% and a 10-month with a 5.3% APY. In less than a year, rates dropped and he found nothing close to current CD rates. She still plans to use CDs to earn a return on her money. She decided to move the funds to a money market account since the interest rate was higher than a CD. The account gives him more flexibility to withdraw money as it considers buying a house.

Short or Long Term CD: Which Should You Choose?

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

“It’s critical to stay proactive by exploring higher-yielding options now, such as CDs or high-yield savings accounts, to ensure that money continues to work for you if you have cash on hand,” Joy said.

Advice: Before you lock money into any CD, make sure you have savings set aside in one emergency fund. Joy also recommends using any extra cash to pay down credit account balances before considering a CD.”I personally coach too many people who hoard cash and keep debt,” she said.

If you have savings that you know you won’t need, locking in a long-term CD before rates drop even more could be a smart move because you’ll have a fixed rate for the next few years if rates keep falling . If you choose a short-term CD right now, such as a six months or for a year term, you may get a great rate now, but if rates fall, you may not be able to find an equal or higher rate at the end of the term, as rates have peaked for most banks.

The Happy Medium: Build a CD ladder

If you’re worried about tying up your money for too long, or think there’s a chance that high rates will stick around for a while, split your savings into a CD scale. In short, you’ll open several CDs with different terms to have money available regularly 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 could invest $1,000 in five different CDs with maturities ranging from one year to five years. This can help you secure some higher interest rates while keeping your savings more liquid because you’re putting some funds into short-term CDs.

Note that most CDs have an early withdrawal penalty — even if you build a CD ladder. A high yield savings account not. Even if rates drop on your savings account, you’ll still have quick access if you need money in a pinch.

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