Factors to help you choose between long term and short terms CDs
Certificates of deposit are financial tools that help investors yield higher returns from their investments over a longer period of time. The returns are higher if the investments remain locked over a longer period of time. Once locked for a particular time period, the amount from the CD cannot be withdrawn without incurring penalties.
Depending on the duration for which the certificate of deposit remains locked, they can be categorized into short term and long term certificate of deposits. The basic features of both the CDs remain the same except for the period of deposit.
Some of the factors that help in deciding between short term and long term certificate of deposits are as follows-
- The first and the foremost factors are accessibility and requirement. If the investor needs the money in the foreseeable future for house payments or children’s education, but still wants a safer method of investing the money for shorter period of time then short time CDs are the best option. On the other hand surplus money can be invested, if not needed urgently, for longer period CDs.
- Since the short term certificate of deposits has very short lock-in period, the interest rates on these CDs are lower than the long term CDs that have a longer time period.
- The market rates are variable and so are the rates offered on both the short term and long term CDs. While most often than not, long term CDs garner more interest, there are offers rolled out by financial institutes that help customers make more money with short term deposits too. This however, is largely dependent on the financial market conditions.
- The continuous income of the investor also has a role to play in deciding whether to invest in short term or long term certificates of deposits. An investor with fixed annual income can easily take the chance to keep his money locked over a longer period of time. On the other hand, an investor with variable monthly income will benefit more from short time certificate of deposits.
The variation in the interest rates will also help in selecting between short term and long term certificate of deposits. If the market research points towards a rise in the interest rate then it is best to keep reinvesting by opting for short term CDs. If the market rates are giving indications of lower interest rates, it is best to stay invested with long term CDs.