Savers with substantial amounts saved are looking for high returns on their investments. With interest rates at elevated levels, certificates of deposit (CDs) have become a popular option. Two types of CDs – long-term and short-term – offer different interest-earning potential.
Traditionally, higher interest rates were associated with longer-term CDs. However, recent market uncertainty has led banks to offer higher rates on shorter-term accounts. Despite this, long-term CDs can still accumulate substantial interest over time.
Let’s compare the earnings of a $20,000 deposit in both types of CDs:
Long-term CDs:
– 18-month CD: 4.26% interest rate, total earnings $21,291.52
– 2-year CD: 4.20% interest rate, total earnings $21,715.28
– 3-year CD: 4.25% interest rate, total earnings $22,659.61
– 5-year CD: 4.20% interest rate, total earnings $24,567.93
Short-term CDs:
– 3-month CD: 4.40% interest rate, total earnings $20,216.46
– 6-month CD: 4.49% interest rate, total earnings $20,444.07
– 9-month CD: 4.26% interest rate, total earnings $20,635.66
– 1-year CD: 4.40% interest rate, total earnings $20,880.00
As shown in the calculations, long-term CDs offer higher returns on a $20,000 deposit than short-term CDs do, even with rates of 4.40% or higher.
Before investing in a long-term CD, it’s essential to calculate your ability to keep the money in the account for the full term, as early withdrawals may result in penalties.
Source: https://www.cbsnews.com/news/20000-long-term-cd-vs-20000-short-term-cd-which-earns-more-now