The choice between a CD and a savings account often comes down to liquidity versus yield.
© Karen Roach, Dmitry Rukhlenko/stock.adobe.com; Photo illustration EncyclopÊdia Britannica, Inc.
Savings accounts and certificates of deposit (CDs) are both relatively low-risk places to keep cash while earning interest. Which one is a better choice depends largely on when youâll need the money and whether youâre willing to lock it up for a fixed period.
Both accounts help preserve cash, but they differ in liquidity, interest rates, and flexibility. Which one is a better fit for your savings goals?
Key Points
- Savings accounts are generally best suited for short- to medium-term goals rather than daily spending.
- CDs lock your money up for a set period, with maturities typically ranging from three months to 10 years.
- Longer-term CDs often offer higher yields.
CD vs. savings account: An overview
CDs and savings account are both cash deposit accounts, and they are considered relatively safeâat least when it comes to preserving your money.
Both types of accounts are protected by the Federal Deposit Insurance Corporation (FDIC), as long as you open your accounts at a member institution. FDIC protection allows for up to $250,000 per depositor across accounts at the same bank. As long as you are within that limit, you can have several protected accounts at the same bank. And if youâre concerned about going beyond FDIC limits, you can open accounts at different institutions to spread the liability around.
Although there are some similarities between CDs and savings accounts, there are some important differences as well.
What is a savings account?
Savings accounts are designed to help you save up for goals or set aside money for an emergency fund. You can generally withdraw money from a savings account when you need it, although some banks may limit certain types of withdrawals or charge fees for excessive transactions.
In general, savings accounts arenât supposed to be used for daily transactions (thatâs a checking account). As long as you keep to the restrictions, your savings account will be considered a deposit account and eligible for a higher yield than you might see with an interest-bearing or money market checking account.
A CD, like a savings account, is a deposit account. However, the Federal Reserve considers it a timed deposit account, meaning you keep your money in the account for a defined time period. Typically, banks offer CDs with maturities of between 3 and 60 months. You might even be able to get a brokered CD with a 10-year maturity designed to be kept in an individual retirement account (IRA).
With a CD, the higher interest rate compensates you for locking up your money until maturity. Typically, you can withdraw the funds before maturity, but if you do, youâll be assessed a penalty of several monthsâ interest.
There are different types of CDs, though. Some wonât penalize you for early withdrawal, but they might have lower yields than their less flexible counterparts.
The main differences between a CD vs. savings account
- A CD comes with a set maturity, making it less liquid than a savings account.
- Longer-term CDs often have higher yields than savings accounts.
- Savings accounts might have minimum requirements, and you might be assessed a monthly âmaintenanceâ fee if your account falls below that minimum. However, the minimum is usually lower than the minimum required to open a CD. Plus, most banks offer a special low- or no-fee savings account for young savers.
Deciding whether to use a CD or savings account depends on your goals and your intentions for the account. In fact, thereâs a good chance that your finances could benefit from using both types of accounts at the same time, but for different goals.
Consider a savings account when âŠ
- You need accessible money, such as for an emergency fund.
- Youâre saving for a short-term goal, such as a large purchase or vacation later in the year.
- You want the money to remain safe and liquid (available to withdraw at a momentâs notice), rather than trying to grow it for future wealth.
- Your opening balance is too small for a CD (and you qualify for a low- or no-fee account).
- You hope to connect the savings account to a checking account as backup for overdraft protection, which allows you to avoid a fee or a âbouncedâ check if there are insufficient funds to settle a charge.
- You hope to take advantage of variable interest rates in a higher-rate environment without the need to open a new account.
Consider a CD when âŠ
- You donât need immediate access to the money and can afford to keep it âlocked upâ for a longer period of time.
- You want the money for a larger medium- to long-term goal, like a down payment on a home or to buy a car.
- You want to benefit if interest rates rise without having to open a new account.
- You have a plan to ladder your CDs (stagger the maturity dates) to provide a balance of access and yield over time.
- You want a set, relatively high cash yield for a longer period of time.
Instead of depositing and withdrawing money whenever you wish, a CD is a âtimedâ account.
EncyclopĂŠdia Britannica, Inc.
Banks and credit unions often offer different rates on savings accounts and CDs, so compare offers before opening an account. If youâre considering a CD, compare yields across different maturities rather than assuming the longest term offers the best rate.
CDs and savings accounts are useful tools for preserving cash and earning interest, but they generally arenât the best vehicles for building long-term wealth.
Because inflation can outpace the returns on cash and many fixed-income investments, consider a diversified portfolio that includes stocks, stock index funds, and, depending on your goals and risk tolerance, alternative investments such as real estate or precious metals.
This article was most recently revised and updated by Miranda MarquitThis article was most recently revised and updated by Doug Ashburn
