CDs vs. saving accounts: Which are better for you?

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Making a commitment to save money is a great step toward building a solid financial future. Once you’ve decided to follow through with your savings goals, it’s time to choose where you will park that cash.

There are several useful options available to save for long-term goals like buying a house and short-term goals like funding your next vacation. Both certificates of deposit (CDs) and savings accounts offer a safe place to store your money until you need it. But each has pros and cons. Understanding the differences can help you determine which one is the better option for your goals.

Let’s take a closer look at the differences between CDs and savings accounts.

What is a certificate of deposit?

A CD is a type of savings vehicle that is available at most financial institutions. When you open a CD, you agree to lock up your funds at the bank and have no access to the money for a specified term. CD term lengths can range from a few months to several years or more. If you want to withdraw your funds before the CD reaches maturity, expect to pay a penalty fee. That’s why it’s important to make sure that you won’t need the funds during the CD term before buying one.

Generally, you’ll earn a guaranteed rate of return when you open a CD.

You can be sure that your deposit is safe if you seek out only banks insured by the Federal Deposit Insurance Corp. and credit unions insured by the National Credit Union Share Insurance Fund. These entities will protect up to $250,000 per depositor, per insured institution, per ownership category.

What is a savings account?

A savings account is a standard type of account offered by banks and credit unions. These accounts are also federally insured up to $250,000, making them an equally safe place to stash your cash.

Opening a savings account is likely to require very little cash upfront. The minimum deposit to open an account varies from bank to bank, and some accounts have no minimum deposit to open.

Once the account is open, you will have quick access to your money when you need it. However, there are some limitations on how often you can withdraw funds out of your savings account. You’ll generally be able to make up to six transfers or withdrawals from your savings account per statement cycle. There are exceptions.

Although some savings accounts offer a competitive APY, not all do. If you’re looking to earn a better return on your savings, consider a high-yield savings account.

When to use a CD versus a savings account

A CD is a low-risk option that can provide a solid boost to your savings. The fixed rate of return is an attractive feature for many savers. You can know exactly how much interest you will earn on your savings during the term, whether it’s six months or five years.

With this structured savings tool, you can save for longer-term goals. For example, let’s say you want to buy a house in five years and put down a big down payment. You can stash your funds in a five-year CD for a guaranteed return. At the end of the term, you can put the money, plus the interest it earned, toward your down payment.

CDs are also a good option for people who have a habit of raiding their savings. Although real emergencies happen, some people struggle to leave their savings untouched in a standard savings account that doesn’t penalize them for withdrawals.

When to use a savings account versus a CD

The main reason to use a savings account is the promise of unfettered liquidity. With a savings account, you have access to the money pretty much whenever you want it.

With this fast access to cash, a savings account can be a good spot to stash money earmarked for an emergency fund. If you need the funds at any time, you’ll be able to access them without paying a penalty. Another good use of a savings account is to save for short-term goals. If you want to save for your holiday shopping or an upcoming vacation, a savings account is a great choice.

The tradeoff is that you could be passing up the opportunity to earn a higher interest rate with a CD. You’ll have to decide which savings vehicle is the best fit for your goals.

Similarities and differences between a savings account and CD

Savings accounts and CDs are vehicles for growing money that you decide to sock away and not use for a while.

Here are some features common to both CDs and savings accounts:

  • Savings accounts and CDs are both interest-bearing.
  • There are limits to accessing funds in savings accounts and CDs.
  • Both products are commonly offered at banks and credit unions, including brick-and-mortar and online institutions.
  • Both products are federally insured when purchased at banks covered by the Federal Deposit Insurance Corp. or at credit unions covered by the National Credit Union Share Insurance Fund.

Here are some ways in which CDs and savings accounts are different:

  • Savings account funds are more accessible than CDs. You can withdraw money when you want, although federal law limits certain types of withdrawals and transfers.
  • CDs generally pay more interest than savings accounts.
  • The yield on a savings account can change, but the yield on a CD is fixed for the term.
  • CDs are term deposits, so funds are locked up for a specific amount of time. Savings accounts are not term deposits.
  • You can add funds to a savings account, but once you open a CD, you generally cannot add money to it.
  • CDs are better vehicles for long-term savings goals, while savings accounts are more suitable for short-term goals.
  • Savings accounts may charge a monthly maintenance fee. CDs do not.
  • The minimum deposit to open a CD account is usually greater than the minimum to open a savings account.
  • Withdrawals that don’t meet account terms are penalized differently. A savings account may be closed or converted to a checking account for excess withdrawals. Early withdrawals of CDs trigger penalty fees that can wipe out earned interest.

How to open a CD or savings account

Opening a savings account or CD is a lot like opening any bank account. Expect to provide photo identification, such as a driver’s license or other government-issued ID, and basic information such as your address, birth date, Social Security number and contact information. 

Depending on the bank or credit union you choose, savings accounts and CDs can be opened online at the financial institution’s website or in a branch location.  

Unless the account has no minimum opening deposit, be prepared to put down the required minimum. If opening the account online, you likely will need to electronically transfer money from another bank account, so have that account information ready.

Bottom line

The choice between a CD and a savings account will be clear based on your current savings goals. If you want quick access to these savings for a short-term goal, then a savings account is the way to go. If you want to maximize your APY for a long-term goal, then a CD might be a better fit.

In either case, make sure to shop around for the best interest rates for both CDs and savings accounts before making a final decision. Move forward once you are clear on the goals you have for your savings.

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