Both a savings account and a certificate of deposit (CD) can offer a safe place to put short-term savings while also earning interest. In fact, it doesn’t necessarily have to be an either/or choice of CD vs. savings. You might decide it makes sense for you to use both as part of an overall savings plan.
But there are important differences to consider as you determine which is the right fit for your financial goals. Read on for everything you need to know about a CD vs. savings account.
What Is a CD Account?
A certificate of deposit (CD) is a financial tool generally used by those who are looking for a higher interest rate than the average savings account might offer. Instead of making several deposits over time—with the ability to withdraw money when it’s needed—a CD account holder typically makes one lump sum deposit that must remain untouched for a preset term (usually three months to five years). If the money is withdrawn before the term is finished, the account holder may have to pay a penalty.
In exchange for locking in your money, CDs generally offer fixed interest rates that are higher than those with traditional savings accounts. The longer the term of the CD, the more interest you’ll earn.
Reasons to Open a CD Account
There are a number of situations when a CD might be an good savings option, including:
- If you’re looking for a low-risk investment. CDs typically don’t pay as much as investments like stocks, bonds, or real estate. But a CD could make sense if you have a low tolerance for risk and you want to make the most of a safe short- or mid-term investment. Also, CDs offer protection from the Federal Deposit Insurance Corporation (FDIC), which insures deposits up to $250,000 per depositor at U.S. member banks. CDs at credit unions are similarly covered by the National Credit Union Administration (NCUA).
- If you have a savings goal but lack discipline. The money in a savings account is easy to access, which may be a plus in some instances. But it might also encourage you to spend more. Putting money in a CD generally eliminates that option—unless you pay an early withdrawal penalty.
- If you have a short-term goal and want a reliable return. Maybe you’re saving for a wedding or a big vacation trip that’s a year or two away. Or perhaps you’re working toward a down payment to buy a home. Because CDs have a fixed rate and term, you should know exactly how much you’ll get when your CD matures. That could make it easier to plan for the future.
- If CD rates are higher. Over the past couple of years, CD rates have risen a fairly significant amount. For instance, in early 2022, the rates were just 1% APY (annual percentage yield). Currently, the rates are higher than 4%. At higher rates, a CD could be a reliable and lucrative savings vehicle.
Pros and Cons of a CD Account
As with any financial tool, there are pros and cons to saving with a CD, especially when you’re comparing a certificate of deposit vs. savings account. Here are a few of the benefits and drawbacks to consider.
Pros
Safety: You can generally count on a CD to keep your money secure. Deposits are FDIC- or NCUA-insured.
A reliable return: With a guaranteed rate and preset term, you know what to expect. You can use an online CD calculator to figure out how much your money will grow.
No fees: Unlike some savings accounts and money market savings accounts, CDs typically don’t charge a monthly maintenance fee. The only fee you usually have to worry about is the penalty you might pay for an early withdrawal.
Higher rates: CDs generally offer a higher interest rate than traditional savings accounts and money market savings accounts. However, you may want to compare CD rates to the competitive APYs offered by online-only high-yield savings accounts.
Cons
Loss of Access: When you put your money into a CD, you can lose access to that cash for months or years. If, for some reason, you need to withdraw your funds, you may have to pay an early withdrawal penalty.
Lower returns: Though CDs pay more than some other savings vehicles, they generally pay less than investments that carry more risk, such as mutual funds or stocks. If you’re saving for retirement, for example, and it’s far in the future, CDs may not be the best tool for growing your wealth.
Interest rate risk: At a time when interest rates are rising, locking in could mean missing out on additional earnings if rates continue to go up. To mitigate that possibility, you may want to check out something called a bump-up CD, which provides a one-time option to bump up to a higher rate.
Inflation risk: With a CD, you may be vulnerable to inflation—which can occur if your savings rate doesn’t keep pace with rising costs and your money loses purchasing power.
What Is a Regular Savings Account?
A regular or traditional savings account is an account you open at a bank, credit union, or other financial institution to save your money while also earning interest. You can withdraw funds from your savings account when you need it, but there may be a monthly limit on certain types of withdrawals.
Uses for a Regular Savings Account
A savings account can be useful in situations in which you might need to access your cash quickly or regularly, including:
- To set up an emergency fund. A savings account can be a good place to keep money you might need for unexpected expenses like car repairs or medical bills.
- To save up for a purchase in the near future. If you need money for something in the next few months, like a new sofa or a down payment on a car, you can save up for it and have it ready for you when you need it.
- To have a set-it-and-forget-it savings plan. Putting your savings on autopilot can help eliminate spending temptation and savings procrastination. You can ask your HR department to direct deposit a portion of your paycheck into your savings account, or you can set up automatic transfers from your checking account to your savings account.
- To keep your savings separate from your checking account. Having two different accounts—checking and savings—allows you to separate your everyday spending money from funds for emergencies or a special purpose.
Pros and Cons of a Regular Savings Account
A regular savings account has upsides and downsides. Consider the following as you’re weighing CD vs. savings.
Pros
Easy to open: It doesn’t take much to open a savings account. The minimum opening deposit requirement at many financial institutions is usually only about $25. Online-only banks often have a $0 minimum deposit. (A CD, on the other hand, may require $500 or more to open.) Once your savings account is open, you can add money to it whenever you like—even if it’s just a small amount at a time.
Peace of mind: When you open a savings account at a federally-insured bank or credit union, your deposits are automatically covered by the FDIC or NCUA up to $250,000 per depositor per institution. While CDs offer this same protection, other investments, such as mutual funds, stocks and bonds, and annuities, don’t.
Convenience: Managing a savings account can be simple and convenient, especially if you link your savings account to a checking account. This can make it easy to move money from one account to the other.
Earn interest: Once you put your money into a savings account, it starts earning interest. And with the power of compounded interest, you can grow your balance over time.
Cons
Low interest: Even with compounding, you can’t expect big-time growth from a regular savings account. These accounts typically earn low interest rates. To get the most for your money and have a better shot at keeping pace with inflation, it can be a good idea to compare various savings account APYs before choosing one. High-yield savings accounts tend to have the highest rates.
Fees: You may need to pay fees—including monthly maintenance fees and minimum balance requirements—with a traditional savings account.
Temptation: Easy account access may be a drawback for those who lack spending discipline.
Variable rates: A savings account usually has a variable interest rate, which means the rate you receive when you open your account can change. That can be a good thing in a rising interest rate environment, but not so much if rates go down. Plus, a variable rate can make planning more difficult than with a fixed-rate CD.
Differences Between a CD and a Regular Savings Account
When you’re trying to decide between a savings account or CDs, you’ll want to investigate every angle. Although CDs and savings accounts share some similarities, such as earning interest and offering a low-risk way to save money, there are also some key differences, such as:
Accessibility: With a savings account, you can usually withdraw money whenever you need it, although some banks may have a monthly limit on certain types of transactions. With most CDs, you can’t remove any of the money in your account until the date of maturity without incurring a penalty.
Interest earned: Though both CDs and savings accounts earn interest, CDs may earn significantly more, especially those with longer terms.
Variable vs. fixed rates: CDs offer fixed interest rates, while interest rates on savings accounts are usually variable.
Flexibility: You can open a savings account with a small deposit (or even no deposit) and keep adding money over time. Many CDs require a deposit of at least $500 to $1,000.
Other Types of Savings Accounts to Consider
When you’re researching certificates of deposit vs. regular savings accounts, and deciding which is right for you, you might also want to explore other types of savings accounts to see if one might be a good option.
- High-Yield Savings Accounts: If you’re looking to maximize the growth in your account with a more competitive APY, you may want to consider a high-yield savings account. These accounts are typically offered by online banks and generally have lower fees and lower minimum balance requirements. Online bank accounts are FDIC-insured, just like traditional bank accounts.
- Money Market Savings Accounts: With these accounts, you can earn interest on your money and have easy access to it. The APY on a money market savings account may be higher than with traditional savings account APY, but the required minimum balance and fees may be higher as well.
- Cash Management Accounts: A cash management account is an interest-bearing account generally offered by a brokerage, investment firm, or a robo-advisor. Providers typically partner with banks that hold the money, pay interest, and offer FDIC coverage. These accounts, which are usually managed online and often have low or no fees, are typically used as a place to hold funds earmarked for investing. But they also can work like a spending account—with access to a debit card, checks, and autopay for bills.
- Specialty Savings Accounts: There are several kinds of specialty savings accounts available, including accounts designed to help young children, teens, and college students learn about managing money.
- Long-term Savings Accounts: If you’re saving for something that’s far down the road, there are accounts that are geared toward those long-term goals. You may want to consider a 529 college savings plan for your children’s tuition, for example, or a traditional or Roth IRA for your retirement.
The Takeaway
Savings accounts and CDs share two important features that can make them appealing to savers: They both pay interest and offer a low-risk place to stash some cash. But there are key differences that can make one or the other a better fit for you.With CDs, you’ll generally receive a higher interest rate, but you can’t touch the money for a set period of time. With a regular savings account, you’ll get easier access to your funds, but usually with a lower interest rate.
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Advisor
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at www.sofi.com/legal/adv.
20 savings challenges that actually work
Are you looking to make some changes in 2023? If beefing up your savings account is one of them, consider trying a savings challenge. These challenges typically ask participants to put aside a certain amount of cash every day until they’ve reached a goal. The challenge turns not spending money into a kind of game, helping people develop better financial habits.
Essentially, a money-saving challenge is a savings plan with a little fun thrown in. While discipline is needed to carry through with the challenge, it feels more like a game than a chore. It’s a less painless, more enjoyable way to develop better financial habits.
Pornyot Palilai/istockphoto
How It Works
Put any change you receive or find in a jar at the end of each day. Then just let it accumulate for a whole year. While many people use debit cards these days in lieu of cash, we still use cash more than we think. To increase your savings, pair this challenge with the next one below.
Pros and Cons
Pros:
- Steady, reliable way to accumulate savings
Cons:
- Requires challengers to use cash
- Can take time to see significant growth
Who Should Do This Challenge?
Anyone who handles physical cash at some point during a month should try this challenge.
MariuszBlach/istockphoto
How It Works
Leave your credit (yes, even cash-back credit cards) and debit cards at home. Instead, use cash for all of your purchases.
Pros and Cons
Pros:
- Cuts down on frivolous spending
- Forces you to think strategically about how to spend your money
Cons:
- Requires bank or ATM trips for most people
Who Should Do This Challenge?
People who are aware they make many small, unimportant purchases should try this challenge.
agrobacter/istockphoto
How It Works
Instead of automatically clicking the “Buy” button on Amazon, hit “Save for Later” for all of your nonessential purchases. Then give yourself a budget and one day a month to buy what you’ve stored in your cart. (Learn about zero-based budgeting.)
Pros and Cons
Pros:
- Enables challengers to still shop on Amazon.
- Helps reduce impulse buys.
- Can foster long-term savings.
Cons:
- Can create a constant urge to spend money if too much time is spent browsing.
- Requires discipline to wait.
Who Should Do This Challenge?
Challengers who buy items from Amazon multiple times a week should practice this challenge.
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How It Works
Map out each and every meal you’re going to have in a given week. Then at the grocery store, buy only what you need to make those meals.
Pros and Cons
Pros:
- Reduces overbuying and food waste.
- Avoids repeat trips to the grocery store.
- Prevents last-minute “what are we having for dinner?” angst.
Cons:
- Requires extensive planning.
- Can remove spontaneity from cooking.
Who Should Do This Challenge?
Anyone who has the time to cook their own meals should consider this challenge. However, if your job keeps you on the move a majority of the day, then you may want to consider other challenges on this list.
SDI Productions/istockphoto
How It Works
Each month, choose one streaming service to watch and ditch the rest.
Pros and Cons
Pros:
- Save money on streaming bills.
- Discover a variety of content you wouldn’t choose under normal circumstances.
Cons:
- Family members may disagree on which service they want each month.
- You won’t always be up-to-date on pop culture.
Who Should Do This Challenge?
Anyone who has multiple streaming apps on their TV or laptop should do this challenge.
Stock photo and footage/istockphoto
How It Works
Aside from essentials, don’t spend any extra money for a set period of time. This includes no app purchases and monthly subscriptions. If you have a spouse or roommate, turn it into a competition by seeing who can go the longest without spending a cent.
Pros and Cons
Pros:
- Quickly reins in spontaneous spending.
- Prompts a reevaluation of needs and wants.
Cons:
- After a month, it can feel stifling and overly restrictive.
Who Should Do This Challenge?
Anyone that needs or wants to quickly save up money should undertake this challenge.
Daniel de la Hoz/istockphoto
How It Works
Some banks allow account holders to round up every purchase and put the change into savings. Enroll in such a program and watch the savings increase each week.
Pros and Cons
Pros:
- Easy and painless.
- Savings should accrue at a gradual, predictable pace
Cons:
- Challengers may need to keep close tabs on their bank accounts, since they will be spending more money than they think with each purchase.
Who Should Do This Challenge?
This is a relatively easy challenge to take on. If your primary bank account can handle a little more cash exiting with each purchase, consider tackling this one.
filadendron/istockphoto
How It Works
This one requires a family member or close friend willing to do a savings challenge with you. The aim is to see who can put the most into savings for a certain time period.
Pros and Cons
Pros:
- Healthy competition can inspire challengers to save more money.
Cons:
- Challengers with different incomes will have different results. You can work around that by competing for what percentage of your monthly income is saved instead of an absolute amount.
Who Should Do This Challenge?
Anyone feeling unmotivated to undergo a savings challenge should undertake the head-to-head challenge.
fizkes/istockphoto
How It Works
Don’t eat out. Make each and every meal at home.
Pros and Cons
Pros:
- You’ll save a lot of money on food.
Cons:
- When you’re tired and stressed, making dinner for your family can be daunting.
Who Should Do This Challenge?
Money saving challengers who recognize that they are spending too much eating out every week should attempt this challenge.
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How It Works
With this challenge, you will save $1,378 in one year. In Week 1, put $1 into your savings account. The next week, put in $2. Continue adding a dollar each week for 52 weeks (a full year).
Pros and Cons
Pros:
- It’s an easy way to try increasing your savings.
- You will have over $1,000 in savings after the challenge.
Cons:
- It’s a yearlong commitment.
- Some challengers will want to be more aggressive in their saving.
Who Should Do This Challenge?
Anyone new to saving money should try this challenge first.
shih-wei/istockphoto
How It Works
Before spending anymore money on grocery bills, challengers must make as many meals as they can from what they have in their pantry and freezer.
Pros and Cons
Pros:
- Curbs food waste.
- Can push you to be creative with your cooking.
Cons:
- Meals may be rather quirky or lopsided by the end.
Who Should Do This Challenge?
Anyone with a stuffed pantry should consider this challenge before purchasing additional groceries.
RapidEye/istockphoto
How It Works
The idea is to cut your spending by an amount equal to 1% of your income. If you make $50,000 a year, you would cut $500 from your annual spending. (Learn about the ideal debt-to-income ratio.)
Pros and Cons
Pros:
- For many, cutting 1% may be all too easy.
Cons:
- You may have to get creative with where you find savings.
- If you have already cut out all frivolous spending, this can be a difficult challenge
Who Should Do This Challenge?
Because it involves tracking your spending for up to a year, anyone looking to gain insight into their spending habits will appreciate this challenge.
damircudic/istockphoto
How It Works
With each paycheck you receive in a given year, make a deposit into your savings account. (If you don’t have one, learn how to open a savings account.) The idea is to increase the amount you save by increments of $3. So you’ll deposit $3 from your first paycheck, $6 from your second, and so on. By your 26th paycheck — assuming you’re paid twice a month — you’ll deposit $78. Do this all year and you’ll save $1,053.
Pros and Cons
Pros:
- Gradually increases in intensity.
- Doesn’t require you to make too many changes.
Cons:
- You may need to adopt other savings challenges if you want to save more money.
- Those on a tight budget may not have enough room in their paycheck to undergo this challenge for all 26 paychecks
Who Should Do This Challenge?
This is a good challenge for anyone whose income can support savings deposits up to $78.
fullempty/istockphoto
How It Works
This is one of the more whimsical challenges on this list. Every Wednesday, see what the high temperature is going to be for your area. Then deposit that amount into your savings account. Your savings will be more aggressive during the summer than in the winter, so you might want to consider a different savings challenge for cold weather!
Pros and Cons
Pros:
- Playful way to save money.
Cons:
- Requires you to have approximately $400 in spare cash each month during the summer months
- People in higher latitudes, which have a milder climate, will save less.
Who Should Do This Challenge?
Anyone who enjoys a little spontaneity in their saving habits should consider this challenge.
Daviles/istockphoto
How It Works
For a year or whatever timespan you choose, make a deposit into a savings account or jar in increments of 5¢. (Learn how to transfer money between banks.) For example, on Day One you add 5¢. On Day Two, add 10¢. If you do this for an entire year, you will save $3,339.75, but your maximum deposit will be only $18.40.
Pros and Cons
Pros:
- Small savings each day.
Cons:
- While it’s easy in the beginning, by the end of the year it may be too aggressive for some budgets.
Who Should Do This Challenge?
Savers who need a little time before they start depositing large amounts should consider this challenge.
BeyondImages/istockphoto
How It Works
It’s easy to lose track of how much you spend each month. Recording and adding up all expenses for 30 days makes you more mindful of your spending.
Pros and Cons
Pros:
- Help you formulate a savings plan for future months.
- Easy to pull off with financial apps that track and categorize your purchases and bills.
Cons:
- Doesn’t actually involve saving money.
Who Should Do This Challenge?
Anyone who doesn’t have a firm grasp on where their money is going should do the Track Your Expenses challenge.
Prostock-Studio/istockphoto
How It Works
Each time you receive a $1 bill as change, deposit that dollar into savings.
Pros and Cons
Pros:
- Relaxed way to accumulate savings.
Cons:
- For significant savings, you may need to do this challenge in conjunction with the cash challenge (#2).
Who Should Do This Challenge?
Anyone who uses cash on a regular basis should consider this savings challenge.
Pongasn68/istockphoto
How It Works
This is an alternate version of the $1 challenge. Therefore, instead of depositing $1 each time you get change, you deposit every $5 bill you get.
Pros and Cons
Pros:
- Expedites the savings process by using a larger bill.
Cons:
- Requires the daily or weekly use of cash to accrue large amounts.
Who Should Do This Challenge?
People who work with cash but who want a more aggressive savings challenge than the $1 Challenge.
acilo/istockphoto
How It Works
If you’re trying to clean up your vocabulary, what better way than to incorporate a swear jar! Each time you break your own rules, add $1 to the swear jar.
Pros and Cons
Pros:
- Save money and become a better role model for your family.
- Learn to express yourself more creatively.
Cons:
- Once you’ve cleaned up your act, you may need another savings challenge.
Who Should Do This Challenge?
Parents looking to clean up their communication should consider this savings challenge.
Photobuay/istockphoto
How It Works
Grab some dice and roll ‘em. Whatever you roll is the amount you deposit into your savings account.
Pros and Cons
Pros:
- The game can be tailored to your specific budget.
- Make your gambling urge work for you instead of against.
Cons:
- If you need to save money aggressively, you may need more dice.
Who Should Do This Challenge?
Anyone who appreciates a playful challenge or loves Las Vegas should consider playing the Dice Challenge.
pxel66/istockphoto
Saving money is important for a variety of reasons, but one of the most crucial is that it helps prevent people from going into debt -– or succumbing to predatory lending practices like payday loans. When you have the money to pay for an emergency, or just necessary big purchases, you don’t have to rely on your credit card. Because of this, you’ll be less likely to have overwhelming debt.
Plus, a strong savings account will enable you to do the things you’ve always wanted: travel, eat at higher end restaurants, upgrade your electronics, or give generous gifts. When you have the money to pay for the things you want, you’ll be more likely to achieve bucket list goals.
fotolgahan/istockphoto
Money saving challenges are definitely helpful for many people. In normal life, it’s far too easy to spend mindlessly (without shopping around for a deal) and emotionally (to reward yourself after a rough day). By suspending your ability to make numerous small purchases, you start thinking of bigger and better ways you can spend your money — after you beef up your retirement and emergency savings, of course.
Atstock Productions/istockphoto
Money saving challenges can help make saving money fun and habitual. When done with a little bit of reflection, you may realize your needs list is mostly full of wants. There’s a challenge for every spending weakness: takeout food, streaming services, Amazon impulse buying, and more. You can typically customize each challenge by changing the duration, the amount saved, or both. It’s a gentle way to encourage better financial habits in yourself or a young family member.
Learn More:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Advisor
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at www.sofi.com/legal/adv.
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Featured Image Credit: Dilok Klaisataporn/istockphoto.
