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3 times to use a long-term CD (and 3 times not to)

A long-term CD can be a part of a successful savings strategy, but there may be better options in certain cases.  Getty Images

Certificates of deposit (CDs) are interest-bearing accounts with terms that generally range from one month to 10 years. When you open a CD, you agree to keep your money in the bank for the full CD term in exchange for an interest rate that is typically higher than you would get with a regular savings account

Any CD with a term longer than one year is a long-term CD. Opening a long-term CD could be an important part of your financial plan, but it's important to consider that you shouldn't withdraw any money before the CD matures — and, if you do, there are often steep penalties for doing so. 

Here are some times when opening a long-term CD could be a good idea — and some situations in which you may want to consider an alternative. 

Open a long-term CD online today and start earning interest

3 times to use a long-term CD (and 3 times not to)

If you're thinking about opening a CD, here's what you should know.

3 times to use a long-term CD

Here are three times when using a long-term CD could be a good idea:

  • You won't need to access the funds: Before you put money into a long-term CD, make sure you have enough cash on hand to cover your expenses. like rent and food, and also have an emergency fund to cover at least three to six months of expenses. If you have money left over, putting some in a long-term CD could make sense, as long as you're confident that you won't need access to the money during the CD term.
  • Rates are high but could fluctuate: One of the major advantages of a CD is that you can lock in your interest rate for the full term. For this reason, if rates are high, a long-term CD could be a good choice for you — especially if it looks like rates might drop in the future due to economic indicators or action by the Federal Reserve.
  • You want to limit withdrawals: Some people will spend money if they have access to it. If that's you, putting some money into a long-term CD could be smart, as you'll no longer be able to spend the money you deposit. This forces you to save rather than spend and also lets you earn interest on the money in the account.

Considering opening a long-term CD? Find one that works for you today.

3 times not to use a long-term CD

Long-term CDs aren't right aren't for every situation. Here are some times when a long-term CD may not make sense.

  • You may need access to the money: If you aren't sure when exactly you will need access to the money you plan to deposit in the CD, a long-term CD may not make sense. If you put $10,000 into a 3-year CD only to find that you need that cash to repair your car, you could have to choose between forgoing the purchase or paying penalties to access your money. The safer choice might be to keep your money in a high-yield savings account instead.
  • Interest rates are increasing: If it seems like rates could increase, putting your money in a long-term CD could lead to remorse if new CDs begin to offer higher interest rates. In that case, a short-term CD could be a good choice. If rates are higher when your short-term CD term ends, you can open a new CD at a higher rate.
  • Short-term CDs are offering better rates: Historically, long-term CDs have typically offered higher rates than short-term options. Right now though, short-term CD rates are very high. In this case, using a short-term CD might be the better option to maximize your interest rate. 

The bottom line

Long-term CDs can be a great option, as you'll lock in your interest rate, but in some cases, other savings products, like short-term CDs and high-yield savings products, may make more sense. Take the time to consider your options to determine what makes the most sense for your money.

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