CD vs Savings: Which Is Best for You?
Benilyn has over a decade of experience as a banking officer. Her expertise is featured throughout Fit Small Business in personal finance, credit card, and real estate investing content.
This article is part of a larger series on Business Banking.
Savings accounts and certificates of deposit (CD) are effective ways to help you save money and earn interest. CDs and savings accounts typically differ in interest rates and ease of access. It’s important to know the different features of each account type to find out which one works best for your savings goals.
What Is a CD?
A certificate of deposit (CD) is a type of deposit product issued by banks and credit unions that offers premium interest rates. A CD requires you to deposit a certain amount of money which should remain in the account for a predetermined term. The available CD terms vary per bank and could be as short as one to three months or as long as five to 10 years. Most financial institutions offer higher interest rates to depositors who can commit to longer terms.
When to Use a CD
It’s best to use a CD account if you are willing to keep your money untouched in the account until the CD term ends. If you have funds that you won’t need to use for a certain period of time, it’s best to put them in a CD account to earn a higher interest. A certificate of deposit account is not a good option if you will need the money any time soon or if you don’t have emergency funds because pretermination may be subject to penalties.
| PROS | CONS |
|---|---|
| Pays higher interest rates than regular savings accounts | Have limited liquidity because you need to commit your money for the entire term |
| Provides fixed returns at a specific time | You will be charged with penalties and fees if you preterminate your account |
| Has a variety of terms and minimum deposit amounts | Have higher minimum deposit requirements compared to savings accounts |
| CDs from federally-insured banks are covered by FDIC-insurance | CDs are typically a fixed-rate investment, which means you are exposed to inflation risk |
What Is a Savings Account?
A savings account is the most basic type of bank product that allows you to deposit money, save funds, and earn interest. Savings accounts allow depositors to withdraw funds anytime without a lock-in period. While savings accounts typically offer modest interest rates, they are more accessible and offer flexibility ideal for short-term savings goals.
When to Use a Savings Account
It’s best to use a savings account if you need a safe place to keep your savings that is also easily accessible whenever you need to withdraw funds. While some savings accounts have limitations on how often you can withdraw, it’s an ideal option if you need to build an emergency fund, save for a short-term goal, or keep the extra funds you have if you don’t know when you will need to use them.
| PROS | CONS |
|---|---|
| Easy to open and access | May have limits on transactions |
| Have the potential to earn interest | Some banks charge fees |
| Savings accounts offered by federally insured banks and other financial institutions are covered by FDIC-insurance | Interest rates are typically low |
Similarities of CD & Savings Accounts
One of the major similarities of CD and savings accounts is that they provide depositors a safe place to save their money and earn interest. They make a good option if you are looking for a deposit account for your short-term savings goals. Furthermore, both CD and savings accounts are covered by FDIC insurance when you open your account with a federally insured bank.
Differences Between CD & Savings Accounts
The most common differences between CD and savings accounts include their interest rates, ease of access, and minimum deposit requirements. Certificates of deposit typically offer higher interest rates compared to traditional savings accounts. However, they have limited liquidity. CDs also require a higher minimum deposit compared to savings accounts. However, savings accounts are generally more flexible, but the interest rates are typically low.
CD vs Savings Comparison
CD | Savings Account | |
|---|---|---|
APY | 0.15% for a one-year CD | 0.07% |
Account Fees | Typically none unless preterminated | Vary by bank |
Deposits | Has minimum deposit requirements; cannot add additional deposits before maturity | Deposits are typically allowed anytime; banks may limit deposit transactions per month |
Withdrawals | Partial withdrawal is not allowed; pretermination is subject to penalties | Typically limited up to six times per month, but varies by bank |
Annual Percentage Yield
The national average annual percentage yield (APY) for a CD with one year term is 0.15% while a regular savings account has an average APY of 0.07%. However, these rates may vary from bank to bank. In most cases, APY varies depending on the account balance. Also, banks typically offer higher APYs for CDs with longer terms.
Account Fees
In general, no fee is charged when you open a certificate of deposit account. However, certain fees will apply if you choose to withdraw your CD account before the term ends. Typically, banks charge account fees for savings accounts, and the amount varies per bank.
Deposits
CDs require a minimum deposit amount upon account opening, and depositors are not allowed to make additional deposits before maturity. For savings accounts, the minimum deposit requirements vary by bank. Deposits to savings accounts are allowed. However, some banks may limit the number of deposit transactions per month.
Withdrawals
Partial withdrawals are not allowed with a CD account. Any withdrawal before the CD’s maturity is considered as pretermination, and this is subject to penalties. However, savings accounts offer more flexibility when it comes to making withdrawals. In most cases, banks limit withdrawals from the number of withdrawals from a savings account to six per month.
Bottom Line
CD and savings accounts are two types of deposit accounts that can help you save money and earn interest. They are both ideal for short to midterm savings goals. While they have similarities in some features, it’s important to know the difference between CDs and savings accounts to find out which one is a better fit for you.
