Certificates of deposit (or CDs) are considered a “time deposit,” which means depositors are obligated to keep their funds on deposit for a specific period of time in order to earn the promised interest rate. There are short-term CDs that mature within a couple of months, as well as long-term CDs that can take years to mature. Even though the best CD rates are often tied to longer-term accounts, there are several benefits associated with opting for a short-term CD instead.
Advantages of Choosing a Short-Term CD
1. CD Rates: Short-term CDs tend to pay lower interest rates than long-term CDs, but still typically pay more than a standard savings account. When seeking a safe place to keep savings that will also hedge against inflation, a competitive short-term CD — like a 6-month CD — may be a better option than even a high-yield savings account.
2. Extremely Low Risk: Most investments require the depositor to take on some risk in order to enjoy a decent return, but when it comes to savings, it’s not a good idea to risk those funds. Short-term CDs allow depositors to earn a slightly higher interest rate while protecting the principal against any market risk. The only way a CD can lose money is if the depositor makes a withdrawal prior to maturity, suffering an early withdrawal penalty that may or may not dip into the principal investment.
3. Liquidity: A long-term CD requires the depositor to lose access to his or her funds for an extended period of time — like a year or more — in order to earn the specified interest rate. For those who are saving in case of a financial emergency or for a short-term goal, a CD with a maturity date of less than a year from account opening ensures there is some liquidity maintained.
CDs are a great option for savers who are interested in earning interest on their deposits, but are risk-averse. The primary goal of depositing in a CD should be to protect savings in a federally-insured account — the interest earned is a nice reward for keeping funds on deposit. Before investing in a CD, be sure you have identified the goals you have for your money and that a CD is the best option for reaching those goals.