Should you invest in short term or long term CD?

A certificate of deposit is a type of savings account which bears interest in it. These accounts usually have a fixed maturity period, and the insurance of these accounts is ensured by Federal Deposit Insurance Corporation. CDs can be opened in any banks, and different banks offer different kind of interest rates on CDs. There are bank representatives who have special authority from the bank to provide interest rates that are usually higher than those provided by other banks. These kinds of facilities are usually provided to regular banking customers. This is just a way to lure customers.

Short Term CD and Long Term CD

Basically there are two different kinds of certificate of deposits that can customers can consider opting for. One is short term CD and another is long term CD. Short term CDs are those in which the money is invested for a shorter period of time. In such cases the rate or return or rate of interest is comparatively lower. These kinds of CDs are more risk prone. Long term CDs are those in which the money is invested for a longer period of time. The rate of interest in such cases is more than that in the short term CDs. Long term CDs are safer, and the chance of incurring a loss is minimal.

How to Choose between Short Term CD and Long Term CD

The choice between a Short Term CD and a Long Term CD can be a tricky one. However the decision can be an easy one if the following things are kept in mind:

• The first and foremost thing that needs to be kept in mind while investing money is that the time period by which you will need the money back. There are chances that you may need the money you are investing now within a two year span to meet some commitment. In such cases you are time bound, and hence, you have to decide the term of your CD accordingly.
• The status of your current income is a big factor in choosing your correct CD. A person with a smooth income with no hitches as such, should opt for a long term CD as he could know that he would not need the CD in near future. And in case the source of income is uncertain then short term CD is the correct choice, as it would mean that the money would be back in your hand in the near future.
• The interest rates are a significant factor in determining the type of CD. The one with a better rate of return should be opted for; so that one the amount matures there is maximum profit.
• Duration of CDs should be determined depending upon the swing expected on interest rates. If the rates are expected to get higher, a short term CD is the correct option, and in case the interest rates are expected to lower down then long term CD is the correct choice.