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Banking Basics

CD or Savings Account: Which One Is Better?

A certificate of deposit (CD) and a savings account are savings tools that work in different ways. Discover the unique benefits of each.

Rebecca Lake • August 6, 2021

In This Article

  1. What Is a Certificate of Deposit?
  2. What Is a Savings Account?
  3. Choosing Between a CD and Savings Account
  4. How to Open a CD or Savings Account
  5. CD vs. Savings Account FAQs
  6. Final Thoughts on CDs and Savings Accounts

Saving money is an important step in reaching your financial goals. But there’s an important question to consider: Where’s the best place to keep your savings? Two of the most common options for saving money are certificates of deposit (also called CDs or CD accounts) and savings accounts. Both of these can help you grow your money. 

But which one is better: a CD or a savings account? Well, this depends on how much interest you hope to earn and your time frame for saving. Read on to learn more and figure out what’s best for your money.   

What Is a Certificate of Deposit?

Certificates of deposit are accounts that allow you to deposit a certain amount of funds for a set period of time. The funds stay in the account until they reach their maturity date. By committing to save money in that account for a set amount of time, you earn a higher interest rate than your typical savings account. 

CDs typically offer fixed interest rates so you can calculate beforehand how much interest you’ll earn over the CD term, which can be as short as 28 or 30 days or as long as 5 years. Just be aware: If you take money out of a CD before it matures, you can be charged an early withdrawal penalty. This penalty is typically a percentage of the interest earned. 


Benefits of Opening a CD Account

There are a few unique benefits of opening a CD account. Some perks to think about are: 

  • Higher interest rates on your savings
  • Grows money you don’t need to use right away
  • An easy way to stash away money for a big purchase
  • Protection for your money in FDIC-insured CD accounts
  • Fixed interest rate when rates on other accounts may fluctuate
  • Withdraw the entire amount when it reaches maturity or roll into a new CD account to keep saving

Something else to keep in mind is that oftentimes the longer the CD term, the higher the APY (annual percentage yield). In other words, the longer you agree to keep your money in the CD account, the more interest you’ll earn.


Potential Drawbacks of a CD Account

The main thing to consider when thinking about a CD account is whether or not you’re prepared to stash your money away for an extended period of time. Taking it out early could result in a penalty, and you’d lose money in the long run. If you think you might need to tap into your savings soon, a savings account might be the better option. 

The maturity date for CDs is when the account matures and the agreed-upon term ends.

1-year CDs mature after 12 months, whereas a 5-year CD would mature after 60 months

What Is a Savings Account?

A savings account is an account where you deposit money to save. While you use checking accounts for spending and paying bills with frequent transactions, savings accounts are less active and more about making deposits and growing your balance over time. 

Savings accounts also let you earn interest on your money. But, they tend to be more flexible than CDs. Depending on the type of savings account, your interest rate might apply to all balances or be tiered with higher balances earning a higher yield. 


Benefits of Opening a Savings Account

Savings accounts are pretty common and a great way to tuck away money. Some benefits that come along with a savings account include:

  • Simple and easy to set up
  • Typically have low opening deposit requirements
  • Your money isn’t locked away for a certain amount of time 
  • Funds can be accessed when you need them
  • Potential for ATM access 
  • Link to checking account usually available for easy transfers
  • Often allow direct deposit

Savings accounts are often equipped with features that help you practice better money habits. For example, Chime offers an Automatic Savings feature that lets you designate a certain amount of each paycheck to go right into your savings¹. You can also choose to round up your purchases and have the extra change get stashed away. 

P.S. You might also consider a high-interest savings account, also called a high-yield savings account. These accounts have special requirements, but they let you grow your balance more quickly with a higher APY


Potential Drawbacks of a Savings Account

There aren’t too many downsides to opening up a savings account since they are so flexible. Keep in mind, there are withdrawal limits to savings accounts. If you make too many withdrawals in a given month, you could face extra fees. 

If you’re comparing it to a CD account, you might think about interest rates and when you plan to use your savings. If you’re good with putting away a large chunk of money, and look forward to seeing your balance grow, a CD might be easy for you to save up toward a pricey goal. 

Choosing Between a CD and Savings Account

If you’re debating between a CD and a savings account, weigh the pros and cons. Make a list of your priorities when it comes to saving. Ask yourself these questions: 

  • What am I saving money for? 
  • When do I plan to spend or use some of my savings? 
  • Am I interested in getting interest on my balance?
  • What features speak to me when it comes to managing my money? 
  • Which option gets me excited about saving money?

Figuring out your financial wants and needs is a great way to get started with the decision-making process. 

How to Open a CD or Savings Account

The first step to opening a certificate of deposit or savings account is figuring out where you want to open it. Each bank, financial institution, or financial technology company will have its own process and requirements. 

In most cases, you’ll have to provide your personal information, like your name, social security number, and mailing address. Then, you’ll decide how much money to deposit. Depending on where you open your account, there may be a minimum deposit you have to make. 

No matter which option you choose, you’re taking a great step in making the most of your money and getting even closer to meeting your future financial goals. 

CD vs. Savings Account FAQs

Still can’t quite decide between a CD and a savings account? Maybe reading the answers to some common questions will help!

What is the difference between a CD and a savings account?

A CD account requires you to lock your money away, while a savings account is more flexible with allowing withdrawals. Certificates of deposit also often have higher interest rates — as long as you’re okay with tucking your money away. 

Is putting money in a CD worth it?

Putting money in a CD may be worth it if you’re willing to part with your funds until the end of the agreed-upon term. Make sure you won’t need to access your funds for the given amount of time to make the most of CD benefits. Otherwise, you could face hefty fees. 

Does a CD or a savings account have a higher interest rate?

CDs often have higher interest rates than savings accounts, but it ultimately depends on the account. High-interest savings accounts, for example, can give you a high payout. Explore rates before you make a choice and make sure you know if they’re fixed or variable. 

Final Thoughts on CDs and Savings Accounts

Whether you pick a CD or a savings account, you’re wise to think about saving up. Saving up doesn’t have to be hard, and who doesn’t love having a good rainy day fund to fall back on? Buying a house, getting a new car, going on that vacation you’ve always wanted — using some type of savings tool is putting you on just the right track to making your dreams come true. 

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