Which CD Term Is Best Right Now? This Expert Says It Depends

Last year, a few CNET Money experts were able to snag certificates of deposit with interest rates above 6%. Since the Federal Reserve's rate cut in September, CD savings rates have been slowly dropping. If you have money coming due from a CD or extra savings you're looking to earn interest on, is a long-term CD worth the squeeze right now? 

The answer depends on your savings goals. Here's where CD rates sit right now and advice from rates and where one of our money experts is moving her money now that her CDs are maturing. 

Long-term CDs aren't paying the best rates right now

In a typical inflation environment, long-term CDs -- those with terms over one year  -- have higher annual percentage yields 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 hold their money for several years.

When inflation is high -- like it has been for the past few years -- interest rates tend to go up. As banks boost interest rates on savings products, like CDs, they typically increase rates on short-term CDs (although with terms of one year or less) to attract customers. Long-term CD interest rates also go up, they tend to stay lower than short-term options, an anomaly known as the inverted yield curve. Financial institutions don't want to commit to paying top interest rates for several years, since they suspect interest rates could soon drop.

As inflation begins to normalize, we're seeing savings rates come down, but short-term CDs still offer higher APYs than long-term options. The highest short-term CD, based on the banks that CNET tracks, offers 4.75%, while the highest long-term CD is paying 4%. 

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

Read more: My CD Is About to Mature. What Should I Do in Today's Falling-Rate Environment?

Short-term CD rates are still worth your while  

With the Fed cutting rates, savers are going to see rates dropping, said Bernadette Joy, a CNET Money expert and founder of Crush Your Money Goals. She recently compared CD rates herself.

Joy had two CDs that matured in August -- an 11-month term with a 6.25% and a 10-month one with a 5.3% APY. In less than a year, rates have fallen and she couldn't find anything close to her current CD rates. She still plans to utilize 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 her more flexibility to withdraw money since she's considering buying a home. 

Short- or long-term CD: Which should you choose?

Compared to last year, CD rates are lower across all terms. Some experts recommend locking your money in a long-term CD for a guaranteed return in a few years, while others recommend sticking to short-term CDs so you'll have access to your money sooner. It's best to be strategic and keep your options open. 

"It's crucial to stay proactive by exploring higher-yield options now, like CDs or high-yield savings accounts, to ensure your money continues to work for you if you have cash set aside," said Joy. 

Tip: Before you lock money into any CD, make sure you have savings set aside in an emergency fund. Joy also recommends using any additional money to pay down balances on credit accounts before considering a CD." I am personally coaching too many people who are hoarding cash AND holding onto debt," she said. 

If you have savings you know you won't need, locking in a long-term CD before rates drop further could be a smart move because you'll have a fixed rate over the next few years if rates drop further. If you choose a short-term CD right now, such as a six-month or one-year term, you may get a high rate now, but if rates fall, you may not be able to find an equal or higher rate when your term ends since 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 high rates could stick around longer, spread your savings across a CD ladder. 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 instance, instead of investing $5,000 in a single CD, you could invest $1,000 in five different CDs with maturity dates ranging from one year to five years. Doing so can help you secure some higher interest rates, while also keeping your savings more liquid since you're putting some funds in short-term CDs.

Keep in mind that most CDs have an early withdrawal penalty -- even if you're building a CD ladder. A high-yield savings account doesn't. Even if rates drop for your savings account, you'll still have quick access if you need the money in a pinch. 

Read more