CD or Savings Account: Which One Is Better?

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

CDs traditionally offer fixed interest rates so you can calculate beforehand how much interest you’ll earn over the term, which can be as short as a few months or as long as five years.¹ However, 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

Opening a CD account carries a few unique benefits:

• Higher interest rates on your savings
• Fast growth for money you don’t need to use right away
• A convenient way to stash money for a big purchase
• NCUA or FDIC insurance to protect your money against bank failure
• Fixed interest rate when rates on other accounts may fluctuate
• Ability to withdraw the entire amount when it matures or roll it into a new CD account to keep saving

Often, 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 without withdrawing it, the more interest you’ll earn.

Ideal situations for CDs

When do CDs make sense? Here are a few times you might consider opening a certificate of deposit:

• When saving for a specific goal: If you have a clear timeline for saving – like buying a house, taking a big vacation, getting married, or having a baby – you can select a high-interest CD with a term length that matches your goals.
• When rates are high: If CD rates are significantly higher than typical savings account rates, investing at least some of your savings in a CD may make sense. Just leave enough money in savings to cover emergencies or short-term goals.
• When the stock market is too volatile: Generally, investing in the stock market will yield more long-term growth; historically, the stock market has a 10% annual yield, though this fluctuates.² However, investing is always a gamble. If the market feels too volatile for you and you want more of a “sure thing,” a CD could be a safer bet.

When to open a CD for the best rate

How do you know when to open a CD for the best rate? You’ll want to pay attention to the various CD rates financial institutions offer. When they seem favorable, open a certificate of deposit and lock in that high rate – before they start to fall back down.

Like any financial decision, it’s always a risk. After all, you could lock in what you think is a strong rate, only for them to increase in the coming months.

Another way to approach CDs is to think about your upcoming financial goals. If you know you have an expensive wedding in two years or want to buy a house in five years, you could put some seed money in a CD that will mature in line with your plans.

Potential drawbacks of a CD account

The main thing to consider when thinking about a CD is whether you’re prepared to stash your money 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 funds sooner, a savings account might be better.

Emergency needs aside, putting your money in a CD also means you have less money to invest in other options, like stocks and real estate.

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 a common and convenient way to tuck away money for various goals. These deposit accounts offer several benefits when it comes to growing your money. For instance, savings accounts:

• Are easy to open
• Typically have a low opening deposit and minimum balance requirements
• Have more liquidity (that is, you can access your money when you need it)
• Offer ATM access
• Link to your checking account for easy transfers
• Usually allow direct deposit

Savings accounts often have features that help you practice better money habits.

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

Ideal situations for a savings account

A bank account designed just for saving money makes sense for pretty much everyone, but there are certain situations in which a savings account is especially ideal:

• In emergencies: Having an emergency fund means you don’t have to rely on credit cards and personal loans when unexpected expenses arise. For instance, if you have a sick pet or your car breaks down, you can use your emergency savings to cover the vet bill or insurance deductible.
• For short-term goals: Taking a vacation next year? Start saving money now with a savings account. Savings accounts make it easy to save for short-term goals.
• Unclear timelines: Maybe you know you’ll need to buy a car in the next few years, but you’re not sure how much longer your current vehicle will last. When the time comes, putting money in a savings account allows you to withdraw money for a down payment on a new car.

Potential drawbacks of a savings account

Since they are flexible, opening a savings account doesn’t have too many downsides. Depending on the financial institution, there may be withdrawal limits to savings accounts. You could face extra fees if you make too many withdrawals in a given month.

Though you can get high interest rates through a high-yield savings account, these can change from time to time. Interest rates are variable. You may open an account with a high APY, but it may decrease over time – unlike a CD, which has a fixed rate.

If you’re debating between a CD and a savings account, 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 helpful way to get started with the decision-making process.

And remember, you can open both a savings account and a CD. Consider putting away a chunk of money you know you don’t need right now in a certificate of deposit to save toward bigger goals. Then, leave the rest of your money in a high-yield savings account to grow and cover unexpected expenses throughout the year.

Compare: CDs vs. savings account

In general, CDs pay out a higher interest rate than savings accounts, though, in recent years, high-yield savings accounts have gotten more competitive, with interest rates nearly as high (or as high) as CDs.

Savings accounts have variable interest rates – they can go up or down – while CDs have fixed interest rates during the length of the term. An advantageous savings account rate today may go down tomorrow, but it could also increase beyond the CD rate you’re locked into.

Ready to open a CD or savings account? We’ll walk you through the steps:

1. Figure out where you want to open the account. Each financial institution or financial technology company will have its own process and requirements. Compare the rate of return for both types of accounts at all the institutions you’re considering. Compare these, as well as fees, customer reviews, mobile apps, ATMs near you, and other features, when selecting the right option for you.
2. Provide the requested information. Once you’ve selected the right institution and type of account, you’ll typically have to provide your personal information, like your name, Social Security number, and mailing address.
3. Fund the account. As a final step, you’ll need to decide how much money to deposit. You may have to make a minimum deposit depending on where you open your account.

No matter which of these low-risk deposit options 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.

You may view the CD vs. savings account conversation as one or the other, but both can be beneficial.

Opening a CD allows you to save for longer-term goals like buying a house and getting married, but opening and maintaining a savings account makes it easier to cover emergency expenses and save for smaller purchases, like concert tickets and a weekend getaway.

Wondering why you need a savings account or CD if you already have a checking account? Here’s our breakdown of the major differences between a checking account and a savings account — and why you need both.

What is the difference between a CD and savings account?

A CD account requires you to lock your money away, while a savings account is more flexible with withdrawals. Certificates of deposit often have higher interest rates.

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 savings account have a higher interest rate?

CDs often have higher interest rates than savings accounts, but it depends on the account. High-interest savings accounts, for example, can give you a high payout. Explore rates before you make a choice.

Is a CD safer than a savings account?

Both CDs and savings accounts are safe ways of growing your savings. They are both protected through FDIC or NCUA insurance, and they’ll both help you grow your money through interest.

The main risk with a CD is that you could need the money before the maturity date. If you make an early withdrawal, you could pay a penalty.

Do you pay taxes on CD interest?

Just like interest earned on money in a savings account, interest in a certificate of deposit account is subject to income taxes. The IRS (and potentially your state and municipality) treat it like any other income, so it’s taxed at the same rate as the rest of your earnings.⁵