People save money for a variety of reasons. Given the diversity of savings goals out there, it makes sense that financial institutions offer numerous ways to save. Most people know about standard savings accounts, but have you heard of certificate of deposit (CD) accounts? Let's explore the difference between CD vs. savings accounts further, as both offer unique ways to save.
What is a CD account?
A certificate of deposit (CD) account is an alternative to a traditional savings account. A CD account typically requires a higher minimum balance than savings accounts, and your funds will usually remain on deposit for a fixed period of time (the “term” of the account). You earn interest by putting a one-time deposit down and can choose your account's term length when opening the CD account.
CD accounts may offer better interest rates than savings accounts. Longer terms will usually also have more favorable rates. Note that your rates will remain fixed for the duration of your CD account's term.
What is a savings account?
A savings account is an account where you can set money aside for your savings goals. Savings accounts are usually meant for putting money aside as opposed to daily spending (which is what checking accounts are for). Withdrawals from savings accounts are allowed, but usually with some limits.
Many savings accounts may also bear interest, though rates are usually variable. The minimum balance required to open a savings account is typically on the lower end.
CD vs. savings in a nutshell
The main factor that separates a CD account vs. a savings account is access to your money. Both types of accounts typically discourage withdrawals, but money in CD accounts is essentially locked. Early withdrawals from CD accounts are likely to come with a penalty.
Deciding between CD vs. savings account
Here’s a quick comparison to keep handy when deciding between a CD or savings account:
When to consider a savings account:
- You need the money to be accessible, like an emergency fund.
- You’re saving for a smaller or relatively short-term goal.
- You’re primarily putting money aside instead of trying to grow it.
- You don’t mind variable interest rates.
- You have a small opening balance.
When to consider a CD account:
- You can afford to let the money sit for a while.
- You’re saving for a bigger or longer-term goal, like a down payment on a home.
- You’re trying to grow your money a little.
- You’d prefer to lock in your interest rate.
- You’ve got a larger opening balance.
Of course, it doesn’t need to be a choice between one or the other. For instance, you might use a savings account to build up a rainy-day fund, and a CD account to save for college.
Every situation is different, which is why there’s more than one way to save. When it comes to choosing between a CD vs. savings account, the “right” choice is the one that meets your needs.