Saving money is an important step in reaching your financial goals. But there’s an important question to consider: What’s the best place to keep your savings?
Two of the most common options for saving money are certificates of deposit (CD accounts) and savings accounts. Both of these can help you grow your money.
So, 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.
What is a certificate of deposit?
Certificates of deposit are time deposits. When you open a CD account, you’re committing to saving money in that account for a set amount of time.
While your money is in the CD, it matures – meaning it earns interest. This is also called the maturity period.
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 five 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
CD accounts can be a good option if you’re looking for higher interest rates on your savings. As a general rule, the longer the CD term, the higher your APY or annual percentage yield (although sometimes banks offer special short-term CDs with a high APY).
Keeping your money in a CD vs. savings account makes sense if you don’t need the cash right away. So, for example, if you’re planning to buy a home in the next two years, you might use a CD with a high APY to stash away your down payment fund. Or, you might use a CD to save up money so you can buy a car with cash.
CD accounts can also be FDIC-insured. This means your money is protected up to a certain amount.
How savings accounts work
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.
Unlike a CD, however, your money isn’t locked into a savings account for a set time period. And, you can withdraw money from savings without facing an early withdrawal penalty. Just keep in mind that federal regulations limit you to six withdrawals from a savings account each month. If you go over that limit, your bank can charge an excess withdrawal penalty.
Some other perks to savings accounts include ATM access to your savings at some bank accounts. You can also set up direct deposit into your savings account to grow your balance automatically. Opting for a savings account with no hidden fees is another way to help you hold onto more of your money.
Like CDs, savings accounts can also be FDIC-insured.
Benefits of opening a savings account
When you compare interest rates and minimum deposits for CDs vs. savings accounts, a CD account can potentially offer a higher APY. But sometimes CDs require a large amount of money, while it’s possible to open a savings account with a tiny amount. For example, you might need $500 or $1,000 to open a CD, but only $1 to open a high-yield savings account online.
Savings accounts can also be a good option for holding money that you might need right away. For instance, it makes more sense to keep your emergency fund in a savings account vs. a CD since you can access it without a penalty.
Are there any downsides to a CD vs. savings account?
Since CDs and savings accounts aren’t exactly the same, it’s natural that they have strengths and weaknesses.
When it comes to interest rates, savings accounts can earn you a higher rate in some situations. For instance, if rates go up, banks can increase the APY for savings accounts. If you’re locked into a CD, however, the APY stays the same until the maturity term expires.
On the flip side, a CD can be a better choice for your money if rates are dropping. For example, if you have a CD at a higher rate than savings accounts, you’ll still earn that rate even if interest rates fall.
As CDs mature, you can also decide whether to withdraw your initial deposit with the interest or roll it into a new CD.
How to open a CD or savings account
Opening a CD vs. savings account is a fairly similar process. Many bank accounts allow you to open either one online. You’ll just need to give the financial institution your personal information, decide how much you want to deposit initially, and make the deposit.
Ultimately, it’s your decision whether to open a savings account or CD. So, remember to compare CDs and savings accounts at different banks. And, think about your goals and how soon you’ll need the money. From there, you’ll be able to find the best place to park your money.