Both a savings account and a certificate of deposit (CD) keep your money safe and earn interest. But the former allows you to withdraw funds whenever, while the latter keeps it locked up for a set period of time, albeit with a higher yield.
When choosing between the two, ask yourself this basic question: When will you need the money?
“If you don’t need the money for a couple of years, locking in the funds in a CD would be best,” said Pamela Rodriguez, a certified financial planner. “If you need the money to buy something within the next few months or even the next year,” consider a savings account.
What is a certificate of deposit?
A certificate of deposit, or CD, is a savings product that comes with a fixed interest rate and term. There are several types of CDs, and each works differently. Typically, you make one initial deposit and agree to keep your funds in the account for a predetermined term, such as six months.
CD rates usually depend on the term. The best 3-month CDs, for instance, provided rates around 5.50%, while a 12-month term may provide better yields because the bank has your money longer. Different banks offer different yields for different terms depending on its need for customer deposits.
Generally, though yields are higher on terms of six to 24 months, than longer-term CDs, because the Fed has raised short-term borrowing rates dramatically to ward off inflation. Market participants believe economic growth will eventually slow, however, which is why longer-term CD yields are typically less competitive right now.
If you bank at a federally insured institution, your deposits are insured by the Federal Deposit Insurance Corp (FDIC) up to $250,000 per depositor, per bank and per account type. Deposit insurance protects you in case the bank fails. Credit union CDs have similar deposit insurance through the National Credit Union Administration (NCUA).
How it works
A CD is a good place to earn interest on funds you won’t need for the entire CD term.
CDs are available at most financial institutions and you can open an account in a few minutes by providing personal information, signing an account agreement and funding the account.
The initial deposit is usually the only time you can add money to your CD. Minimum opening requirements for a high-yield CD range from $500 to $2,500, but there are some that don’t have minimum balance requirements. The bank or credit union usually compounds interest daily or monthly and adds it to the account once a month.
Your interest rate won’t change during the term. But if you take money from the account before the maturity date, you’ll owe an early withdrawal penalty.
At maturity, you’ll have the option to withdraw the balance plus interest, move it to a new CD with a different term or allow the account to roll over at the same term. Note that if it rolls over it will likely have a new interest rate.
Types of CD accounts
Traditional CDs are a standard account where you make a one-time deposit that meets the bank or credit union’s minimum opening requirement. Your deposit earns a fixed interest rate for the duration of the term. If you withdraw money before the maturity date, you’ll pay a penalty.
High-yield CDs are traditional CDs that pay higher yields. Many high-yield CDs have low opening minimum deposits and no monthly fees.
Bump-up CDs allow you to request a rate increase from your bank or credit union. You’re usually allowed one rate increase per term. These CDs usually come with a lower starting yield compared to a traditional CD.
Step-up CDs automatically increase your interest rate over time. Your bank or credit union will automatically raise the rate by a predetermined amount at certain intervals during the term.
No-penalty CDs allow you to withdraw your money from the account before the maturity date without incurring a penalty. There’s usually a short waiting period, about a week or so, before you can take out the funds.
Jumbo CDs are CDs with very large balances. They typically require an opening minimum deposit of $100,000. Most jumbo CDs pay lower APYs than a traditional CD.
What is a savings account?
A savings account is a type of interest-earning deposit account you can open at a bank or credit union. These accounts allow you to deposit and withdraw money at will, though some financial institutions limit withdrawals to six per month.
Savings accounts usually have low, or no, minimum deposit requirements and fees. The interest rates you can earn vary widely, from 0.01% to 5.00% APY or more.
Like CDs, savings accounts can be FDIC-insured, depending on the bank.
How it works
A savings account is a good place to store money you don’t need for regular transactions — like making purchases and paying bills — but you can withdraw easily if needed.
Opening one of these accounts usually takes just a few minutes. Many banks and credit unions have a completely online process where you provide some personal information, sign an account agreement and fund the account.
Each savings account has different requirements. But generally, you’ll make a small opening deposit of around $5. Most banks and credit unions don’t charge monthly fees — and the ones that do typically let you waive those fees if you meet requirements, such as maintaining a certain daily average balance.
If the savings account pays interest, then the bank or credit union typically compounds interest daily and pays it at the end of the month. Interest rates are typically variable, so they may change at any time.
Types of savings accounts
Standard savings account is a straightforward savings account that seldomly charges fees but typically pays a lower interest rate. Often customers open these where they have their checking account without shopping around, but that could cost you several percentage points in yield.
High-yield savings accounts are standard savings accounts, but offer a much higher interest rate on deposits. You’ll often find these accounts at online banks.
Money market accounts (MMAs) are a hybrid between a checking and a savings account. You may be able to use a connected debit card or write checks against the account, and interest rates may be tiered. But like a savings account, you may be limited to making six withdrawals per month. These also usually require a higher minimum opening deposit.
CD vs. savings account at a glance
CDs and savings accounts have a lot in common. They both offer a place to store money you don’t need for daily transactions.
The main difference between the two accounts is the length of time before you can access your money. A CD requires you to lock up your funds for a certain term, and it typically charges penalties if you withdraw your money early, but offers a higher rate. Savings accounts offer the ability to withdraw money anytime, but offer a lower rate.
A savings account might be a good choice if you:
- May need the money in the near future.
- Want to make regular deposits.
- Believe market rates will increase soon and want to take advantage of rising rates.
A CD might be a good choice if you:
- Won’t need your funds for the duration of the term.
- Don’t need to make additional deposits into the account.
- Believe market rates will soon decline and want to lock in a high interest rate.
- Want the security of a fixed interest rate.
- Struggle with saving money and need to put distance between you and your funds.
| FEATURE | SAVINGS ACCOUNT | CERTIFICATE OF DEPOSIT (CD) |
|---|---|---|
Pays interest | Yes | Yes |
Fixed interest rate | No | Yes |
Has a term where you can’t access the money | No | Yes |
Withdrawal limits | Sometimes | Yes |
Deposit limits | No | Yes |
Minimum opening deposit | Usually yes | Usually yes |
Frequently asked questions (FAQs)
Banks typically offer deposit insurance of $250,000 per person per account for both CDs and savings accounts.. So neither type of account is safer than the other.
However, a CD offers a fixed rate and a guaranteed return on your deposit, while savings account returns are less certain because the interest rate is variable.
A CD ladder is a strategy that can help you maximize your returns while keeping some access to funds. You start by opening several CD accounts with different terms. When one CD matures, you can either withdraw the funds or roll the money into a new CD.
For example, if you have $25,000 to put into a CD you can buy a 1-year, 2-year, 3-year, 4-year and a 5-year CD, each with $5,000. Every year you’ll have access to $5,000, you can then cash out or reinvest.
Having both a CD and a savings account could be a good way to achieve different goals. You may decide to put your emergency fund in a savings account where you can access your money easily. Then, you can invest extra money into a high-yield CD to earn the best returns.
A high-yield savings account is a type of savings account that usually comes with an interest rate much higher than the national average rate.
Yes, CDs tend to pay more interest than savings accounts. The national average rate on a savings account is 0.43% compared to 1.76% APY on a 12-month CD.
