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MoneyWatch: Managing Your Money

How to choose a long-term CD

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By Kendall Little

/ CBS News

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Locking in a long-term CD today can help you benefit from high interest rates for years to come. Getty Images

With federal interest rates hitting a plateau (at least for now), long-term CDs are taking on a new appeal for many savers. 

As rate hikes slow and the amount that banks offer on certificates of deposit (CDs) levels off, you may be considering the best way to lock in a great rate for the longest time possible. But because they can affect your financial situation for years to come, it's important to choose your long-term CD wisely. 

Everything from how you plan to use your savings balance to the interest rate, penalties and more can affect the long-term CD you choose. Now may be a great time to lock in a long-term CD, but you'll get the most benefit if you take time to compare your options to find the best one for your individual goals.

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How to choose a long-term CD

While there's no exact length defining long-term CDs, the most common — and highest-earning — options you'll find today are typically three years to five years. 

One of the most important things to consider when you're choosing a long-term CD is, of course, the interest rate. Some CDs in this range earn as much as 4.5% APY or more. Though long-term CDs often earn more, CDs with shorter terms currently tend to carry slightly higher APYs than longer terms. So if you're looking for a longer CD with the best interest rate, you might consider a two- or three-year CD. 

Another thing you should account for is your own timeline. If you have a goal for the money you plan to put in your CD, use that as the determining factor. Long-term CDs still carry penalty fees, so if you need to withdraw your funds early you could lose a portion (or all) of the interest you've earned. On the other hand, if you know you have a very long time before you need the money, you'll likely get more value over time by locking in the longest term you can at the highest rate available.

Find out how much you can earn on a long-term CD by !

Why now is a good time to lock in a long-term CD

After more than a year of federal interest rate hikes, we could be reaching a peak. While the Federal Reserve may still raise rates again this year, June's interest rate pause signaled that the agency could be ready to slow its pace.

As a result, interest rates on high-yield savings accounts and CDs may no longer rise at the same rate we've seen over the past several months. That means now could be a great time to lock in a high rate for as long as possible.

Say, for example, you lock in a five-year CD today with an APY of 4.3% and starting deposit of $5,000. By the time the CD matures, you would have earned more than $1,000 in interest, for a total balance of around $6,171.

If you lock in a shorter-term CD, you may be able to score a higher rate today — but there's no guarantee you'll get as competitive a rate when the CD matures. For example, you can currently find one-year CDs that earn 5.25% APY. But if rates remain stagnant or even fall over the next several months, CD rates could be much lower in a year's time and even lower after that. 

If you don't need to access the money in a shorter time period, you can potentially increase your earnings over time with a longer term today. .

The bottom line

Long-term CDs can make a great option for your savings, whether we've actually seen the peak that rates will rise to or if you simply want to ensure you're able to earn today's high rates long into the future. Choosing the right CD will depend on a few different factors — including the interest rate you're looking for, how long you're able to lock up your balance and potential penalties. But with a bit of thought about your financial goals and research into long-term CDs available now, you can ensure you get the best interest rates on your cash for years to come. 

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Edited by Matt Richardson

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