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SmartAsset: When to Save in a CD vs. Savings Account

Certificate of deposit (CD) accounts and savings accounts can help you keep your money safe and secure while earning some interest on balances. While they’re both deposit accounts, they aren’t exactly the same when it comes to how much interest you can earn, the fees you might pay and how easily you can access your money. Deciding whether to open a CD vs. savings account can depend on your goals. A financial advisor could help you create a financial plan for your savings needs and goals.

How CD Accounts Work

A CD is a type of time deposit account. When you put money into a CD you agree to leave it there for a set maturity term. While the money is in the CD it earns interest according to the rate set by the bank. Once the CD matures, you can withdraw your initial deposit and the interest earned or roll the entire amount into a new CD.

Some CDs are short-term, with maturities lasting one year or less. Other CDs can mature over a period of several years instead. Generally, banks offer higher rates for CDs with longer terms as an incentive to get you to keep your money in place. It’s possible, however, to find shorter-term CDs with higher promotional rates.

CDs usually don’t have any monthly fees but you might pay a fee for withdrawing money early. Banks can assess an early withdrawal penalty if you take money out of a CD before it matures. The penalty may be equal to some or all of the interest earned, depending on the length of the CD term and when you take money out.

Pros and Cons of Saving With CDs

CD accounts can offer a secure place to keep money that you don’t plan to spend right away. Like other deposit accounts, CDs are covered by FDIC insurance when held at an FDIC member bank. Your money is held at a bank, not in the market, so the risk of losing money is almost nonexistent.

Banks typically set fixed rates for CDs, so you have predictability when it comes to calculating how much interest you can earn over the maturity term. You can choose CDs that fit your savings goals, based on how long you plan to save. As long as you don’t need to take any money out before maturity, you won’t have to worry about an early withdrawal penalty.

That’s arguably the biggest drawback of CDs since you can’t tap into them any time you feel like it. The exception is if your bank offers a no-penalty CD. With this type of CD, you could withdraw money early without a penalty. The trade-off is that no-penalty CDs may offer lower interest rates than other types of CDs.

Building a CD ladder is a simple way to get around early withdrawal penalties. A CD ladder consists of multiple CDs with different maturity terms. The idea is that you’ll always be close to a maturity date so that if you need to withdraw money early for any reason, you should be able to without a penalty. Laddering CDs can also help you stay ahead of changing interest rates so you’re not locked into low-rate CDs if rates go up over time.

How a Savings Account Works

SmartAsset: When to Save in a CD vs. Savings Account

A savings account is a deposit account that allows you to earn interest on your balances over time. There are no maturity terms with savings accounts; you can withdraw money as needed. But banks can limit the number of withdrawals you can make per month and charge a fee for going over that limit. Savings accounts typically don’t offer checks or ATM cards.

The interest rate you can earn with a savings account depends largely on where you open it. Traditional banks and credit unions tend to pay lower interest rates to savers overall. You’re also more likely to pay a monthly fee for a savings account at a brick-and-mortar bank.

Online banks, on the other hand, can offer high-yield savings accounts with competitive rates and no monthly fees. That’s because online banks tend to have lower overhead costs than traditional banks and so can pass those savings on to their customers.

Pros and Cons of Savings Accounts

Savings accounts can offer flexibility and easy access to your money. If you need to cover an emergency expense, for example, you can transfer money from savings to a linked checking account in minutes. You can also add money to a savings account on a regular basis so you can grow your money over time. Most CDs don’t allow you to do that.

Like CDs, savings accounts are safe places to keep your money. Savings accounts can be FDIC-insured or NCUA-insured if they’re held at member credit unions. You can leave money in a savings account until you need it and the interest will keep compounding in the meantime.

While online savings accounts can offer competitive rates, you typically won’t get rich from keeping money in savings alone. You’ll also need to consider investing some of it in the market to grow your wealth. And some banks can charge monthly maintenance fees that outweigh the amount of interest you might be earning each month.

When to Save in a CD vs. Savings Account

Deciding whether to use a CD or savings account can depend on your goals, how long you plan to save and what kind of access you’ll need to your money.

Saving in a CD could make sense if you:

  • Want a safe place to keep money that you’re certain you won’t need for several months or years
  • Have other liquid savings you can tap into if necessary
  • Are interested in building a CD ladder to capitalize on rising interest rates

Generally, CDs are best for holding money you won’t need right away. So if you’re planning a vacation in six months you might keep the money for the trip in a CD until then to earn interest. Or you might save money toward a down payment on a car in a high-yield CD. You might also consider an IRA CD if you’re saving for retirement.

Keeping money in a savings account could be the better fit if you:

  • Want to keep your money in a safe place where it’s easily accessible
  • Would like to be able to add money to savings on a regular basis (i.e. weekly or monthly)
  • Don’t want to worry about getting hit with early withdrawal penalties if you need to take money out of savings

Savings accounts are great for short- or long-term goals. For example, you might set up a high-yield savings account at an online bank to hold your emergency fund. You could also set up savings accounts for sinking funds to cover planned expenses.

When comparing CDs, pay attention to the maturity terms, rates and minimum deposit requirements. Also, consider whether a specialty CD like a raise your rate CD or no-penalty CD might be a good fit for your situation. When comparing online savings accounts, check the interest rate and APY as well as the minimum deposit requirements and monthly fees, if any.

Bottom Line

SmartAsset: When to Save in a CD vs. Savings Account

If you have multiple goals you’re saving toward, you could skip the CD vs. savings account debate and open one of each. Having money in CDs and savings can help you make the most of interest earnings while keeping some of your funds handy in case you need them. Just remember to be aware of any fees you might pay, which could detract from the interest you’re earning.

Checking Account Tips

  • Consider talking to your financial advisor about whether you should be saving in a CD vs. savings account. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • In addition to savings accounts and CD accounts, you might also consider a high-interest checking account or money market account to hold some of your funds. Online banks can offer interest checking accounts with low or no monthly fees. You can also find online money market accounts with solid rates that allow you to write checks or make a limited number of withdrawals per month using a linked debit card.

Photo credits: ©iStock.com/skynesher, ©iStock.com/damircudic, ©iStock.com/EmirMemedovski

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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