$100,000 short-term CD vs. $100,000 long-term CD: Which will earn more interest now?

In a traditional economic landscape, interest rates on long-term certificate of deposit (CD) accounts were typically much higher than those available with short-term CDs — and the logic was easy to understand. Since savers were being asked to keep their funds frozen with a bank for an extended period of time, they would be rewarded with a higher interest rate than those who elected to keep their funds in an account for just a few months. But the economic climate many savers find themselves in this spring is far from traditional.

Inflation rose again in April and is now nearing 4%, a report from the Bureau of Labor Statistics revealed this week. With an inflation rate nearly two percentage points above the Federal Reserve’s target 2% goal, the chances of an interest rate cut when the central bank meets again in June are now incredibly low. That will keep interest rates elevated and costs high for borrowers, many of whom are already contending with the daily impacts of rising inflation.

In this climate, savers may see competitive rates on short-term CD accounts, naturally making them an attractive option for those looking to deposit a large, six-figure sum such as $100,000. But will they actually earn more interest with an account that matures in three to six months? Or will they be better served by depositing this amount into a long-term account, which could earn them more interest while offering extended protection against today’s market volatility? Below, we’ll break down the interest-earning capabilities of each that savers should know before getting started.

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$100,000 long-term CD vs. $100,000 short-term CD: Which will earn more interest now?

In recent years, rates on CDs have bucked tradition, with higher ones available for long-term accounts and lower ones tied to short-term options. That said, the rate differential is negligible.

Here’s how much $100,000 will currently earn in four short-term CD accounts, calculated against the top rate for each and the assumption that no early withdrawal penalties are levied against the account:

• $100,000 3-month CD at 3.90%: $961.06 upon maturity
• $100,000 6-month CD at 4.10%: $2,029.41 upon maturity
• $100,000 9-month CD at 4.00%: $2,985.24 upon maturity
• $100,000 1-year CD at 4.10%: $4,100.00 upon maturity

And here’s how much a $100,000 deposit would earn in four long-term CD accounts, using the same parameters as above:

• $100,000 18-month CD at 4.09%: $6,197.31 upon maturity
• $100,000 2-year CD at 4.16%: $8,493.06 upon maturity
• $100,000 3-year CD at 4.13%: $12,908.75 upon maturity
• $100,000 5-year CD at 4.15%: $22,545.22 upon maturity

A $100,000 CD will earn more with a long-term CD than it will with a short-term CD now, even with the 18-month CD having a slightly lower rate than the 1-year CD. That’s largely due to the extended interest-earning timeline that the long-term CDs allow. And with interest compounding over 18 months or longer, savers who deposit $100,000 into one of these accounts stand to earn between $6,200 and $22,500, approximately, if they get started now.

Learn more about your current CD account options here.

The bottom line

Depositing $100,000 into a CD – no matter its term length – should not be done recklessly as the early withdrawal penalty on an account of this size can be substantial. That said, if you’re confident in your ability to see the account through to its maturity date and want to earn as much interest as possible in the interim, long-term CDs offer the better way to do that. And if you act now, not only will you earn thousands (or tens of thousands) of dollars worth of interest, but you’ll also protect your principal in a way that investments won’t allow. That will allow you to pivot your savings strategy once the economy changes and the rate climate stabilizes again.