CD Vs. Savings account: which one to choose?
If you’re looking for a safe place to store your money and earn interest, it’s hard to go wrong with a certificate of deposit or savings account. Understanding the differences between these two deposit accounts can help you determine which is the best choice for your goals.
Let’s take a closer look at the differences between CDs and savings accounts.
CDs (certificates of deposit)
Certificates of deposit are safe places to save money, especially in times of economic uncertainty. Unlike stocks, bonds and other assets that fluctuate in value, CDs offer a reliable rate of return.
They are a good product for savers who do not like risk or who are at a stage in life where investing in more volatile assets is not the best solution. They are also useful for savers who have specific goals, such as buying a house or car, or paying for a wedding or vacation.
What is a CD?
A certificate of deposit (CD) is a type of savings account that requires the account holder to leave their money in the account for a specified period of time, known as the “CD term”, in exchange for a fixed interest rate. fixed interest.
CDs can be opened at banks, including physical and online banks, credit unions, and brokerage firms such as Fidelity Investments.
If you open the account online on the bank’s website, you will likely need to transfer money electronically from another bank account, so have that account information handy.
How do CDs work?
CDs generally pay more interest than traditional savings accounts and the annual percentage yield (APY) is fixed. In a rising rate environment, it makes sense to build a CD ladder so that all of your money isn’t locked into a lower rate as yields rise.
Opening a CD account usually requires a minimum deposit. Some banks do not require a minimum deposit, but most institutions do. They can range from $50 to $1,000 or more. Once a traditional CD is opened and funded, the depositor cannot add money to the account during the term.
The duration of CDs generally ranges from a few months to five years. If you withdraw your funds before the CD matures, you will pay a penalty that could significantly reduce your interest income.
Traditional CDs are common, but there are other types of CDs. Among them are bump-up, no-penalty, jumbo and IRA CDs.
Look for banks insured by the Federal Deposit Insurance Corp. (FDIC) and credit unions insured by the National Credit Union Share Insurance Fund (NCUSIF). This coverage will protect up to $250,000 per depositor, per insured institution, per property class.
When to choose a CD rather than a savings account?
A CD is a low-risk option that can give your savings a solid boost. The fixed rate of return is an attractive feature for many savers. You can find out exactly how much interest you’ll earn on your savings over the term, whether it’s six months or five years.
A CD is a good savings tool for medium-term goals. Let’s say you want to buy a car in three years and make a big down payment. You can open a three-year CD for a guaranteed return. At the end of the term, you can apply your principal investment, plus the interest it has earned, to your down payment.
CDs are best when you know you won’t need the funds for a while.
Savings accounts are also safe places to store money and grow your money. Unlike CDs, however, returns on traditional savings accounts are variable rather than fixed. They can go up and down.
Yields on savings have risen since the Federal Reserve began aggressively raising its benchmark interest rate this year.
Online banks generally pay higher returns because they have less overhead than branches.
What is a savings account?
A savings account is a standard product offered by banks and credit unions. It usually pays interest, so you get a return on your savings.
Online banks have much lower overhead costs than traditional banks, allowing them to offer more competitive returns on their deposit products. It’s good to find a high-yield savings account that pays an above-average APY.
How does a savings account work?
Opening a savings account will probably require very little money initially. The minimum deposit to open an account varies from bank to bank, and some accounts have no minimum at all.
Once the account is opened, you will have easy access to your money when you need it. Unlike a CD, a savings account doesn’t require you to lock in your money for a set period of time.
However, there may be restrictions on withdrawals. You will generally be able to make up to six transfers or withdrawals from your savings account per statement cycle. According to its policy, your bank may close your savings account or convert it to a checking account if you exceed the withdrawal limit.
You can add money to a savings account whenever you want. Some savers set up direct debits from their salary that go directly to a savings account.
Some savings accounts charge monthly maintenance fees unless you maintain a certain balance.
When to choose a savings account rather than a CD?
Use a savings account instead of a CD if you need regular access to money. With a CD, you will not be able to withdraw the funds before the account’s due date without paying a penalty. With a savings account, you have access to money pretty much whenever you want, although you’re usually limited to six withdrawals per month.
Immediate access to cash makes a savings account a good place for an emergency fund. Another good use for a savings account is to save for short-term goals. If you want to save money for holiday or vacation shopping, a savings account is a great choice.
The trade-off is that you might be missing out on the opportunity to earn a higher interest rate with a CD. You will need to decide which savings vehicle is best suited to your goals.
At the end of the line
Savings returns are on the rise, so now is a great time to get into the habit of saving money.
Depending on the institution you choose, savings accounts and CDs can be opened at a branch or online through your bank’s website. Just be sure to go to a federally insured bank or credit union.