CD vs Savings Accounts: Investing in Your Future

CD vs Savings Accounts: Investing in Your Future

CD vs Savings Accounts: Investing in Your Future

CD vs Savings Accounts: Investing in Your Future

April 13, 2023

April 13, 2023

April 13, 2023

April 13, 2023

CDs vs Savings Accounts
CDs vs Savings Accounts
CDs vs Savings Accounts

When it comes to saving money, there are several options available. While some may choose to keep their money tucked away in a shoebox, others look for safer ways to secure their financial future. Two popular choices for saving money are certificates of deposit (CD) and savings accounts

While both options offer a way to increase your financial wellbeing, there are significant differences between the two. Let’s take a deeper dive to learn about both CDs and Savings accounts to help you choose which option is best tailored for your needs.

Savings Accounts

Savings accounts are secure places to put money to help grow your net worth. The rate on a traditional savings account isn't fixed and will vary over time. Depending on the bank, interest rates can range anywhere from .01% to 5%.

With these rates varying so much, it is worth shopping around if you're looking to get the best rate. Online banks tend to offer high-yield savings accounts and can pay higher rates because they have less overhead to take into consideration.

What is a savings account?

A savings account is a standard bank account in which users deposit their money and earn interest on that balance over time. 

Savings accounts let you freely transfer money to other account folders without any fee and allow you to withdraw cash at any time. However, some financial institutions may set a cap limit for the number of times you can withdraw in a given period. 

There are many alternatives to high-yield savings accounts, including a traditional savings account which brick-and-mortar financial institutions typically offer. These big banks have lower interest rates because they don’t need to offer a competitive APY (annual percentage yield).

what is a savings account

How a savings account works

When opening up a savings account, there is very little, sometimes no minimum deposit that is required. Be sure to read the fine print because each bank has their own policies.

It’s also important to keep in mind that if you exceed the number of withdrawals you’re allowed in a given statement period, you may risk losing your account. Some banks have policies that allow them to close your account or change it to a regular checking account as a penalty. 

Once your account is open, the money can be easily accessible. Some financial institutions may charge a monthly fee if you don’t have a certain amount of money in your account.

Advantages of a Savings Account

The most significant advantage of savings accounts is its accessibility. You can withdraw or add money with ease. These accounts are insured by the FDIC, and have modest returns. Also, it's a highly liquid investment, as you can withdraw your funds at any time. All in all, savings accounts are much more flexible than certificates of deposit.

Savings account advantages

Certificates of Deposit (CDs)

For people who don’t like risk and want a good rate of return, certificates of deposit can be a smart financial investment. They are also a safe place to put your money in order to grow your savings.

CDs have similarities to savings accounts but do differ in some ways. They can be useful for those looking to save their money for a specific reason, whether it be purchasing a car, looking to travel, or need to pay for student loans.

What is a Certificate of Deposit?

Certificates of Deposit, or CDs, are a type of savings account that comes with a higher interest rate than most traditional savings accounts. Unlike fluctuating interest rates on savings accounts, the interest rate for a certificate of deposit is fixed.

The tradeoff, however, is that you must leave your money in the account for a set amount of time. This time frame can range from several months to several years.

happy couple traveling

How a CD works

Certificates of deposit can be opened at credit unions, brick-and-mortar banks as well as online banks. Before you open a CD account, it’s helpful to know if the account is FDIC (Federal Deposit Insurance Corp) insured or not. Under this coverage, you will have up to $250,000 insured.

Most financial institutions require that you deposit a certain amount of money when you open a CD account. These deposits can range from as little as $50 up to as much as $1,000. Unlike a traditional savings account, once you deposit the money into a CD, you won’t be able to add money to that account until the term is finished. 

As previously mentioned, these accounts will generally pay higher rates but the bank will hold the money for a fixed period. Breaking the CD early can result in a penalty, which is why it's essential to understand the terms associated with the specific CD you are interested in. 

Advantages of CDs

The most notable benefit of a CD is the higher interest rate, often 2.5% or more per year. This is because longer-term CDs typically generate higher returns. Plus, it’s a low-risk investment, and your deposit is FDIC insured, depending on the bank. CDs are also ideal for people who need all their funds in the near future as they lock up your funds for a specific duration.

happy couple checking cd account

Choosing What’s Best For You

When comparing CDs and savings accounts, the choice comes down to your financial situation and goals. If you need a flexible and more accessible investment option, a savings account may be the better option for you. Savings accounts offer the advantage of access to money whenever you need it, but it's important to remember that the interest rate may be lower.

On the other hand, if you’re looking for a higher interest rate and have enough cash set aside that you won’t need access to for some time, CDs may be the best option. Certificates of deposit are also ideal if you want to earn a higher interest rate on your money with minimal risk.

Other Factors to Consider: 

When it comes to saving money, it's important to keep in mind the different fees and charges associated with each option. For example, some banks may charge fees for withdrawals or deposits that exceed a certain number per month. With a CD, there may be penalties for breaking the CD before the end of the term. Regardless of which option you choose, it's essential to read the fine print and understand the fees and charges associated with each account.

Ultimately, both CDs and savings accounts offer a way to save your money and grow your wealth. Personal finance apps, such as Hiatus, can help you keep track of your different accounts so you can see what you have and where.

saving money