Today’s CDs and savings accounts are both paying record rates, but which one should you choose?
The CD vs. savings account debate is popular today as interest rates are high, and consumers wonder how to save or invest their money. Savings accounts are more flexible than CDs, but some CDs may pay a higher APY, and it never changes.
Here’s what to consider when choosing between a CD and a savings account.
- Determine your goals and timeline – Savings accounts don’t have a timeline or penalties for early withdrawal, but CDs do. Know your goal timeline and when you need funds to choose the right account.
- Fixed vs. variable rates – Savings accounts have variable rates that can change anytime; CDs have fixed rates that remain the same for the entire term.
- Accessibility – Savings account funds are easier to access in an emergency; CDs have an early withdrawal penalty if you take the funds early.
What is a CD?
CDs or Certificates of Deposits are deposits with a specific term. You typically deposit funds upon opening, and they start earning interest immediately.
Most banks credit the interest to your account monthly, allowing you to see your balance grow. It’s helpful to use a CD interest calculator to see how much money you can make during the CD term you choose.
CDs have terms from a few days to 10 years, but you cannot withdraw the funds for the chosen term, or if you do, you’ll pay a penalty usually equal to three or more months of interest.
Types of CDs
- Traditional CD: These CDs allow a one-time deposit when you open the account and have a fixed interest rate for the term. You can withdraw the cash at maturity or roll it into another term.
- Bump-up CD: CDs lock money up for the entire term. If interest rates increase, you can’t access the higher rates. Bump-up CDs allow access to higher rates; most banks allow one bump-up per term.
- No-penalty CD: If you aren’t sure if you’ll need the funds before the CD expires, a no-penalty CD allows the option to withdraw the funds without a penalty. Just beware that the APY is typically lower for this benefit.
- CD ladders: If you worry about tying up your funds long-term, a CD ladder allows you to invest funds in shorter-term CDs and reinvest them in a longer-term CD upon maturity if you don’t need them. This also allows a great way to take advantage of higher rates if interest rates increase.
When CDs Make Sense
Because CDs lock your funds in for the entire term, you should choose them when you know you won’t need them.
For example, if you need the funds within a year, you may choose the most attractive CD with a maturity date within a year. You can choose the CD with the most attractive rate and let your funds grow.
However, they don’t make sense when you’ll need consistent access to the funds or choose a term longer than when you’ll need the funds.
What is a Savings Account?
A savings account also earns interest on your deposits but without the time requirements.
You can deposit and withdraw cash as needed; however, some banks limit the number of withdrawals per month. If you exceed their limit, the bank may charge a fee, so know the bank’s rules.
Savings accounts have variable interest rates, meaning the rate can change at any time if the market changes.
When Savings Accounts Make Sense
Savings accounts are better for situations when you’ll need funds often.
For example, an emergency fund shouldn’t be locked in a CD because you can’t predict when you’ll need it. Savings accounts allow instant access, if needed, without any penalties.
Types of Savings Accounts
- Traditional savings: Most brick-and-mortar banks offer traditional savings accounts with exceptionally low APYs.
- High-yield savings: HYSAs offer interest rates as high as 10x the standard savings accounts. Online-only banks typically offer them because they have less overhead and can afford higher APYs. You’ll still have multiple ways to access your funds despite being an online account.
Similarities Between a CD vs. Savings Account
When choosing between a CD and a savings account, it helps to understand the similarities.
- Both accounts earn interest, either compounded daily or monthly
- Most CDs and savings accounts have a minimum opening balance requirement, especially higher rate accounts
- Many CDs and savings accounts have minimum monthly balance requirements to earn the stated APY
Differences Between a CD vs. Savings Account
Both accounts help you reach financial goals, such as paying off a debt consolidation loan or achieving debt relief, but there are significant differences between the two.
Typically, CDs pay higher interest rates than even high-yield savings accounts. However, a comparison between the best CD rates and best high-yield savings account rates can get a bit complicated.
- Savings: You don’t need to keep the funds in a savings account for any length of time.
- CDs: You must keep the funds in a CD for the duration of the term
- Savings: No penalty for withdrawing funds unless you exceed the allowed number of withdrawals the bank states
- CDs: Most CDs have an early withdrawal penalty if you take your funds before the term expires
Type of Interest Rate
- Savings: Most savings account rates are variable; this means they can change throughout the time you have the account for better or worse
- CDs: Unless you have a bump-up CD, the rate remains fixed for CDs until the term expires
- Savings: Depending on where you open a savings account, you may earn much lower interest rates than on a CD. The exception is online high-yield savings accounts, but you must be comfortable banking online.
- CDs: Many CDs pay high interest rates, but it depends on the term. Most banks have promotional rates on certain terms, allowing your money to grow faster.
Final Thoughts on CDs vs. Savings Accounts
Choosing between a CD and a savings account can be a big decision.
CDs pay higher rates on some terms but require you to tie up your funds for a specified time. Savings accounts allow more flexibility but may pay lower interest rates.
Both options offer great ways to reach your financial goals and to help you get out of debt.
That’s why it is important to determine your financial goals, timeline, and how well you can tolerate tying your funds up for a specified period before choosing.
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