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Historically, interest rates on long-term certificate of deposit (CD) accounts were higher than those available with short-term CDs. And that logic was easy to follow. Banks and lending institutions were willing to pay more interest to savers who left their money in an account for more than a year than they were willing to pay to savers who regained access in 12 months or less. In the volatile economic climate of recent years, however, this relationship changed with many banks. As a result, savers often found better rates on short-term CDs that matured under a year than they did with their long-term counterparts.
This has made interest-earning projections on CDs less predictable than they were in the past. But predictability is something savers need right now, especially with inflation surging again and even more so if there’s a large, five-figure deposit amount under consideration. So, if you have $40,000 you’re looking to deposit into a CD now, it helps to know if you’ll earn more interest with a 6-month option or a 1-year alternative. Thanks to the CD account’s fixed ratethis math will be simple to calculate. Below, we’ll outline the returns that savers can expect to receive if they take action now.
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$40,000 6-month CD vs. $40,000 1-year CD: Which will earn more interest now?
CD interest rates will vary by term and lender, underscoring the importance of shopping around to secure the best offer. Here’s how much interest a 6-month CD and a 1-year CD can earn with a $40,000 deposit now, calculated against the top rates available for each and the assumption that no early withdrawal penalties will be issued against either:
- $40,000 6-month CD at 4.10%: $811.76 upon maturity
- $40,000 1-year CD at 4.11%: $1,644.00 upon maturity
- Difference between accounts: The 1-year CD will earn $832.24 more
While the 1-year CD comes with an interest rate that’s just 0.01% higher than the 6-month CD, the extended interest-earning timeline will result in a return that’s more than double the short-term CD.
That noted, savers can earn more than $800 with a CD of this size before the end of 2026, at which point they can shift their savings strategy based on market conditions. That’s something that they won’t be able to do with the 1-year CD unless they’re willing to pay the early withdrawal fee, which can negate all of the interest earned to that stage.
As is the case with most CD account considerations, savers will need to weigh the big returns they’re guaranteed to receive against the flexibility they may otherwise require, especially in today’s inflationary environment. It’s not always an easy decision to make, but with online marketplaces making it simple to compare rates, terms, banks and more in one location, savers can start closely reviewing their options right now.
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The bottom line
A $40,000 1-year CD account will earn more than double that of a 6-month CD with the same deposit. But that’s not because of a higher rate, as the difference is almost entirely due to the extended interest-earning timeline. So the relationship of high rates for long-term CDs and low rates for short-term CDs remains muddled.
Savers, then, should take a broad approach by reviewing their interest earnings with both while understanding the effort that will be required by sacrificing access to their funds for a full year. For some savers, the long-term CD may still be worth it, while others may find the approximate $800 they can earn with the short-term CD sufficient, as they can still pivot their approach before the end of the year.