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CD vs. saving account: Which should you choose?

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Certificates of deposit (CDs) and savings accounts both offer a safe place to save your money. 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 time-deposit account that is available at most financial institutions. When you open a CD, you agree to lock up your funds at the bank for a specified term. In exchange, you’ll earn a guaranteed rate of return. CDs typically require a minimum deposit, though the amount ranges quite a bit from institution to institution.

CD term lengths can range from a few months to several years. 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.

As long as you open a CD with an insured bank or credit union, your funds will be safe. Look for banks insured by the Federal Deposit Insurance Corp. (FDIC) and credit unions insured by the National Credit Union Share Insurance Fund (NCUSIF). This coverage 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 typically offer interest, allowing you to earn a return on your savings. Savings 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.

Although some of the best 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 at an online bank. Online banks have much lower overheard costs than brick-and-mortar banks, so they can offer more competitive yields on their deposit products.

When to use a CD instead of 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.

A CD is better for medium-term goals. For example, let’s say you want to buy a car in three years and put down a big down payment. You can stash your funds in a three-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 better when you know that there is no chance you will need the funds for a certain period of time, such as six or nine months, until you go on that vacation or when you’re ready to put a down payment on your next car.

When to use a savings account instead of a CD

Use a savings account instead of a CD if you’ll need to access the money. With a CD, you likely won’t be able to access the money before the account’s maturity date without paying a penalty. With a savings account, you have access to the money pretty much whenever you want it (though you’ll be limited to six withdrawals per month).

With this fast access to cash, a savings account can be a good spot for an emergency fund. 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 trade-off 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

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

  • Savings accounts and CDs both earn interest.
  • 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 FDIC or NCUSIF.

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 medium-term savings goals, while savings accounts are more suitable for short-term goals and your emergency fund.
  • 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.

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Written by
Libby Wells
Contributing writer
Libby Wells covers banking and deposit products. She has more than 30 years’ experience as a writer and editor for newspapers, magazines and online publications.
Edited by
Banking editor
Reviewed by
Senior wealth manager, LourdMurray