What’s better: A 1-year or a 5-year CD?

Comparing CD Terms: Should You Choose a 1-Year or a 5-Year CD?

If you’re saving for the future and want a secure place to grow your money, a certificate of deposit (CD) can be a smart option. CDs offer guaranteed returns and often pay more interest than traditional savings accounts. In exchange, you agree to keep your money in the account for a set period of time.

That period—known as the term—can be short, like one year, or longer, like five years. But which term is better for your goals? Let’s explore the advantages and trade-offs of each option.

Why choose a 1-year CD?

A 1-year CD ties up your money for a relatively short amount of time. This can be ideal if:

Pros:

• You expect to need the funds within a year or two
• You want flexibility in case interest rates rise
• Early withdrawal penalties are typically smaller on shorter terms

Cons:

• You may earn a lower rate compared to long-term CDs
• You’ll need to reinvest more frequently, possibly at a lower future rate
• You don’t have immediate access to the money within the year term

Why consider a 5-year CD?

A 5-year CD locks in your rate for a longer time. This could be a good choice if:

Pros:

• You want consistent, predictable returns
• You don’t need the money for several years
• It protects you from potential drops in interest rates

Cons:

• Your money is less accessible for a longer period
• Early withdrawal penalties are typically higher
• You might miss out if rates go up during the term

Factors that affect CD rates

When choosing between a short-term vs long-term CD, you might factor in interest rates. A few things can impact the interest rate you’re offered on a CD:

• Economic conditions: Interest rates often rise or fall with broader market trends
• Term length: Longer terms may offer higher rates
• Bank policies: Different banks may offer different promotions or rates
• Deposit amount: Some CDs offer better rates for larger balances

Can’t decide? Try a CD ladder

If you’re unsure which term to choose, a CD ladder may offer the balance and flexibility you need. This strategy involves dividing your money across several CDs with different maturity dates.

For example, if you have $10,000, you could put:

• $2,000 in a 1-year CD
• $2,000 in a 2-year CD
• $2,000 in a 3-year CD
• $2,000 in a 4-year CD
• $2,000 in a 5-year CD

As each CD matures, you can either access the funds or reinvest in a new CD. This approach provides regular access to portions of your money while still earning potentially higher long-term returns.

What’s the best CD strategy for you?

There’s no one-size-fits-all answer. A 1-year CD may suit your needs if you value flexibility or anticipate using the money soon. A 5-year CD might be better for long-term planning and stable growth. Or consider a CD ladder to get the best of both worlds.

Whichever path you choose, putting your money into a CD is a step toward safer, more predictable savings.

We’re here to help! Learn more about opening a certificate of deposit with us.