Banking 101: Should You Consider a Short-Term CD in Today's Market?

Short-term CDs are excellent savings options for savers who want to maximize interest earned on their deposits but don’t want to lock up their savings for long stretches of time. This may give them an advantage over long-term CDs in today's low-interest rate environment.

Sometimes called time deposits, with certificates of deposits (CDs), your funds are typically required to stay in your account for a specified period of time, or you risk facing withdrawal penalties. That specified period of time — called a maturity — for short-term CDs is often only three to 12 months. 

Why consider a short-term CD 

When you open a certificate of deposit, you are agreeing to keep your funds in your account until the CD reaches maturity, which can range from three months to seven years. Some short-term CDs, however, can have terms as short as 28 days and as long as one year.  

While the most favorable rates are typically reserved for longer-term CDs, short-term CDs can be particularly valuable because they allow you to still earn interest without the downside of having to commit to a long term length. 

More specifically, short-term CDS offer the following benefits: 

• Potentially higher interest rates than other deposit accounts: In general, CDs often offer higher interest rates than other deposit accounts. Currently, the average APY for a 1-year CD is 0.649%. That’s compared with the current average APY of 0.191% for savings accounts and 0.218% for money market accounts.
• Increased liquidity: While CDs are not as liquid as other forms of deposit accounts — such as money market, savings and checking accounts — short-term CDs in particular offer more liquidity than CDs of other maturities, as you are only committing to a term of three months to one year. Additionally, some CDs offer penalty-free withdrawals, which makes it even easier to access your funds.
• FDIC-insured: CDs are a safe place to stash and grow your cash, as they are FDIC-insured up to the legal limits per depositor, per financial institution, per ownership category. That’s in contrast to investment products, which tend to yield higher returns, but also come with increased risk as they are not FDIC-insured.
• Fixed rate: With savings accounts, money market accounts and checking accounts, you might find your interest rate goes up from time to time — but it can also go down. With CDs, your rate is often locked in until it reaches maturity. This is especially valuable in a plunging rate environment. 

Should you get a short-term, mid-term or a long-term CD?

Whether you should get a short-term CD or a long-term CD depends on when you will need the funds you are depositing. If you take on a longer maturity than you can handle, you could end up facing steep early withdrawal penalties and losing a significant amount of interest.

Finding the sweet spot between letting your money grow and still having it accessible if you truly need it is key. Below are the three typical maturities for CDs — short-term, mid-term and long-term — and when they are likely the best fit:  

• You will need your funds in the next three months to one year.
• You’re committed to saving money for a set amount of time, but find yourself consistently dipping into your standard savings account and making withdrawals.
• You are okay with earning a lower APY in exchange for a shorter time commitment. 

• You will need your funds within the next one to three years.
• You’re focused on growing your funds and saving them for a goal that you have in the future, but don’t want to make the ultimate time commitment. 

• You won’t need your funds for at least the next four years. 
• You want to earn the highest APY possible and are willing to take on a lengthy time commitment in order to do so.

How to use short-term CDs in a CD ladder

Short-term CDs can be an integral product to include in a CD ladder, a strategy that savvy savers can use to maximize interest earned on their deposits, while still maintaining some level of liquidity. 

With a CD ladder, you spread a lump-sum deposit across a number of CDs that have steadily increasing maturities. As those CDs mature, the idea is that you will renew your CD with a longer term. In a CD ladder, short-term CDs are the first steps of the ladder, and as time goes on, those steps will gradually turn into longer-term CDs. 

For example, if you have $15,000 to deposit into a CD, instead of stashing the entire amount in one CD, you can opt to build a CD ladder by dividing that $15,000 deposit into five separate CDs at $3,000 each. The idea is that those five different CDs will all have different maturities, ranging from one year to five years. 

When your one-year CD matures, you can then renew it as a five-year CD. When your two-year CD matures, you can then renew it as a five-year CD as well. Ultimately, your ladder will consist exclusively of five-year CDs, but you will still have the benefit of liquidity because there will be a different CD maturing each year. 

Starting your ladder with short-term CDs is integral, as that will allow you to maintain access to your cash every few months or every year (depending on your CD’s maturity) and gradually build a ladder consisting of longer-term CDs.

What to consider when shopping for short-term CDs 

When shopping for a short-term CD, you should take the following factors into consideration.

Make sure you can meet deposit minimums

Many CDs require a minimum deposit, but not all do. Additionally, in some cases, bigger deposits will yield more favorable rates, which is certainly worth taking into consideration.

If you have a hefty amount to set aside, you can explore jumbo CDs. These types of CDs generally require large minimum deposits (often $25,000), but they can reward you with higher APYs. For example, in July 2020, the average APY for a regular 12-month CD was 0.24%, while the average APY for a jumbo 12-month CD was significantly higher at 1.10%.

Look at early withdrawal penalties 

The early withdrawal penalties associated with your short-term CD could be a deal breaker, especially if you struggle with the self-discipline required to set your funds aside and not touch them. 

In 2019, the average early withdrawal penalty for a 6-month CD was 89 days’ worth of interest, and for a 1-year CD it was 120 days’ worth of interest. Consider the early withdrawal penalties associated with a CD before committing to one. 

Take note of renewal rules 

In some cases, when your CD matures, your financial institution will automatically renew your CD or roll your funds over into a new CD. However, your bank or credit union is required to give you prior notice before your CD matures, notifying you of its maturity date and whether it will automatically renew. 

Make sure to review a potential product’s renewal policies to avoid accidentally locking your funds into a new CD — especially if it’s at a lower interest rate than your original CD. 

Don’t forget to consider alternative CDs

There are a number of alternative CDs that are worth considering, depending on your priorities. 

For example, a no-penalty CD, which enables you to make a partial or full withdrawal before your CD’s maturity without penalty, might be a good fit for you if you want a higher level of liquidity. On the other hand, if you are focused on maximizing your interest, you might want to take a chance on a variable-rate CD, which has an interest rate that can go up or down. 

Make a point to hash out your priorities before you start shopping so you know what to look out for when comparing the available options. 

Best short-term CD rates

To find the best short-term CD rates, we combed through our database on DepositAccounts and searched for the current, highest APY for each term length. Rates listed below are accurate as of 7/11/2020 for Spectrum Credit Union and Pen Air Federal Credit Union and 7/16/2020 for Communitywide FCU. To be considered, the bank or credit union had to be offered nationwide and have a health rating above a C.