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 If the money is withdrawn before the term is finished, the account holder may have to pay a penalty.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.
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.
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.
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.
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.
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.
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