One of the best short-term savings vehicles is the 6-month CD: a certificate of deposit with a six-month term. Savers and investors who buy 6-month CDs are typically looking for interest rates on deposits that are higher than more liquid financial products, such as a standard savings account. They may also want to build a CD ladder during times of rising interest rates.
How 6-Month CDs Work
Certificates of deposit, or CDs, are deposit accounts that pay a stated interest rate for a certain period of time, which is the term of the CD. CDs usually have a minimum deposit amount, such as $500 or $1,000,and the bank or financial institution will typically charge a fee if the CD holder withdraws principal before the end of the term, also known as the maturity date.
For example, if you deposit $1,000 into a 6-month CD that has an annual percentage yield (APY) of two percent, your interest at the end of the term, assuming only one interest payment is made, will be $10, making your ending balance $1,010. Some banks may make monthly interest payments that are compounded, which means you could earn more than $10 during that period.
At the end of the term just before maturity, the CD holder has the option of renewing the CD for another term. This decision would be appropriate if the CD holder does not need their money within the next six months.
Advantages and Disadvantages of 6-Month CDs
The most common CD terms are 6-month, one-year, 18-month, two-year, and five-year CDs. In general, the longer the term of the CD, the higher the interest rate paid to the CD holder. Therefore, if you want to buy a 6-month CD, it usually means that your savings objective is short-term. More specifically, if you need the money for a purpose within one year but not less than six months, a 6-month CD can be a smart choice for you.
However, some savers and investors buy 6-month CDs as a vehicle for short-term investingwhen interest rates are rising. The reason for this is that the rates for CDs typically increase as the prevailing interest rates, controlled by the Federal Reserve, increase. However, CDs with longer terms will continue to pay the same interest rate until the term ends.
Advantages
- Liquidity:If you need access to your principle in the short term, a 6-month CD has an advantage over CDs with longer maturities because withdrawals before maturity will incur an early withdrawal fee or penalty. Therefore, 6-month CDs are more liquid than CDs with longer maturities.
- Higher Interest Rates Than Savings Accounts:Cash accounts at banks either pay no interest, or they pay interest rates that are near zero, such as 0.1 percent. In simple interest, that's one penny per year for every $100 on deposit. 6-month CDs may pay an APY of one percent, two percent, or more.
- Investing for Rising Interest Rates:When interest rates are rising, the rates on short-term deposits are also increasing. For this reason, shorter maturity dates have an advantage over longer maturity dates in a rising rate environment.
Disadvantages
- Early Withdrawal Penalties:If you need to withdraw cash from your 6-month CD before the maturity date (within 6 months of the initial deposit), the financial institution where you hold the CD will charge an early withdrawal penalty. For CDs with less than one-year maturities, banks typically charge three months of interest.
- Low-Interest Rates:While 6-month CDs do pay higher interest than the average savings account at a bank, the interest rates are almost always lower than CDs with longer maturities.
Who Should Buy 6-Month CDs
Before buying a 6-month CD, be sure to review the advantages and disadvantages carefully. Individuals or businesses wanting to earn higher rates of interest on deposits not needed for at least six months may benefit from buying 6-month CDs. When interest rates are rising, savers and investors wanting to take advantage of higher renewal rates may also consider buying 6-month CDs.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circ*mstances does this information represent a recommendation to buy or sell securities.
FAQs
APYs are subject to change at any time without notice. Six-month CD rates are a great way to maximize your short-term savings, especially if you can score a higher interest rate. Your money isn't tied up as long as with longer CD terms, giving you the flexibility to pivot your investing strategy as needed.
How much can I make on a 6 month CD? ›
Compounding Monthly
| Financial Providers | CD Term | APY |
|---|
| Highest APY Newtek Bank | 6 months | 5.55% |
| Vast Bank | 6 months | 5.50% |
| HAB Bank | 6 months | 5.48% |
| Neighborhood National Bank | 6 months | 5.43% |
6 more rowsBest 6-Month CDs
- TotalDirectBank 6 Month CD: 5.51% APY.
- Rising Bank 6 Month CD: 5.35% APY.
- Newtek Bank 6 Month CD: 5.35% APY.
- Popular Direct 6 Month CD: 5.30% APY.
- Vio Bank 6 Month CD: 5.25% APY.
- America First Credit Union 6 Month Certificate: 5.25% APY.
- Western Alliance Bank 6 Month CD, powered by Raisin: 5.23% APY.
Yes, if you're opening one soon. If you're planning to open a short-term CD soon, then it's likely a smart move, as it could earn you more interest than a longer-term CD would.
How do 6-month CDs work? ›
How does a 6-month CD work? A 6-month CD, or Certificate of Deposit is a type of savings account offered by EagleBank with a fixed term of six months. It allows you to deposit a specific amount of money for this period, during which it earns interest at a predetermined rate.
What bank is paying 5% on CDs? ›
Highest current CD rates (overall)
| Institution name | APY | Term length |
|---|
| Morgan Stanley | 5.05% | 2 years |
| LendingClub Bank | 5.00% | 18 months |
| TAB Bank | 5.00% | 18 months |
| My eBanc | 5.00% | 18 months |
31 more rowsThat all said, here's how much a $1,000 CD will make in a year, based on four possible interest rate scenarios: At 6.00%: $60 (for a total of $1,060 total after one year) At 5.75%: $57.50 (for a total of $1,057.50 total after one year)
How much does a $5000 CD make in a year? ›
How much interest would you make on a $5,000 CD? We estimate that a $5,000 CD deposit can make roughly $25 to $275 in interest after one year. In comparison, a $10,000 CD deposit makes around $50 to $550 in interest after a year, depending on the bank.
Do I pay taxes on CD interest? ›
Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.
Where can I get 7% interest on my money? ›
7% Interest Savings Accounts: What You Need To Know
- As of May 2024, no banks are offering 7% interest rates on savings accounts.
- Two credit unions have high-interest checking accounts: Landmark Credit Union Premium Checking with 7.50% APY and OnPath Credit Union High Yield Checking with 7.00% APY.
But unlike years past, short-term CDs are paying out more than longer terms. That means you can earn a high annual percentage yield (APY) on your money without having to lock up your savings for a long time. In fact, you could secure a great CD rate with a 6-month commitment.
Are there any 7% CDs? ›
Can You Get a 7% CD Account? There was a lot of excitement in August 2023 about a few credit unions offering 7% APYs on certificates. But those rates were offered for a limited time only and are no longer available. However, the nation's best CD rates are still well above 5%, with some pushing toward 6%.
Is 6 month CD better than 1 year? ›
A 12-month CD will often come with a higher interest rate than a 6-month CD, though this isn't always a given. Right now, though, many banks are offering a better rate for a 12-month CD. So if your goal is to earn the maximum amount of interest, then tying your money up for a year may be the right choice.
What is a downside of CDs? ›
Disadvantages of investing in CDs
As noted previously, since CDs have a set interest rate and maturity date, you typically can't withdraw the money from the CD without paying a penalty. The penalty ranges from a minimum of multiple months' worth of interest to more, depending on the bank and term of the CD.
What are the risks of short-term CD? ›
Risks associated with short-term CDs
Before you invest in short-term CDs, make sure you understand the main drawbacks, such as: Generally, lower rates than longer-term CDs. Potentially lower returns than other investments. Early withdrawal penalty if you access cash before CD maturity.
How long should you keep money in a CD? ›
Traditionally, in your typical ladder, five-year CDs have a higher yield than one-year CDs. But these days, you're likely to see a CD with a term of around six months to 18 months will likely have the highest yield in your ladder.
Is it worth doing a 3 month CD? ›
Yes, a three-month CD can be worth it if you're looking for a safe, FDIC-insured account that earns guaranteed interest on money you'd otherwise leave untouched in a checking or savings account.
Why does a 6 month CD have higher interest rates? ›
CD rates are largely influenced by the federal funds rate. As such, the banks are more willing to offer a high rate on a short-term CD because they're more likely to turn a profit due to the elevated federal funds rate.
