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If you’re looking for a place to keep short-term savings, both certificates of deposit (CDs) and savings accounts are good options. Each offers safety and interest earnings. But while these two types of savings accounts share some features, they serve different purposes in your financial toolbox. The best place to park your money depends on your financial situation and savings goals.
Make sure you understand the limitations and implications of each type of savings vehicle before you decide where to put your money.
What Is a Savings Account?
A savings account is a type of interest-bearing account found at banks and credit unions. They’re commonly used for saving money for an emergency fund, vacations, house down payments or other financial goals. In other words, a savings account is usually a good place to keep money you don’t plan on spending right away, but might need to access on short notice.
How Does a Savings Account Work?
Savings accounts are pretty simple. You place money into your account and your bank or credit union pays you interest on those deposits. If you need your money, you can withdraw it, but you may be limited in certain types of transactions—like wire transfers or debit card withdrawals—to six per month, depending on your financial institution.
If you need to deposit money in your savings account, you can transfer funds from your checking account or deposit a check or cash at an ATM or bank branch.
What Is a Certificate of Deposit (CD)?
A certificate of deposit (CD) is another type of account that allows you to save money at a bank or credit union. While both savings accounts and CDs pay you interest on your deposit, a CD is a timed deposit. This means you commit to leaving your full balance in the account for an agreed upon amount of time, often in exchange for a higher interest rate than a savings account might pay. A CD might be a better choice than a savings account if you know you won’t need access to your money immediately.
How Does a Certificate of Deposit Work?
With a CD, you’re guaranteed to earn a certain rate of return on your savings, but you have to agree to leave the money in the CD until its date of maturity. Withdrawing your funds early could cost you fees and penalties, negating any interest you might have earned.
The best CD rates are currently near or above 5.00% APY. Minimum deposit requirements vary by institution.
The traditional CD is the most common type, but it’s not the only option available. Financial institutions offer nontraditional CDs as well, including bump-up, no-penalty and jumbo CDs. The term, or duration, of CDs commonly range from six months to five years. CD types and terms vary by institution.
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Similarities of CDs and Savings Accounts
CDs and savings accounts have a few important things in common:
- Short-term savings. Both CDs and savings accounts are good places to put money that you need for short-term savings goals.
- FDIC or NCUA insurance. Most banks and credit unions that offer savings accounts or CDs are FDIC or NCUA insured, but be sure to double-check before you put your money there.
- Low-risk, low-yield investments. Both of these accounts can be good places to keep your emergency fund or your short-term cash for specific short-term savings goals, not places to invest for retirement.
- Some liquidity. Savings accounts will let you withdraw your cash at any time without penalty (although your bank may limit you to six withdrawals per month). CDs typically charge early withdrawal penalties for withdrawing money before the agreed-upon term is up.
Differences Between CDs vs. Savings Accounts
If you’re trying to choose between a CD and a savings account, it’s important to understand the differences:
- Access. When you put money into a CD, you agree to leave your money in the account for a specific “term” or length of time. Unless it’s a no-penalty CD, you’ll incur an early withdrawal penalty for taking your money out before the term is up. Savings accounts don’t require you to make any specific time commitment—you can put money in and withdraw it tomorrow if needed.
- Interest rates. Savings accounts generally have a single rate, which changes according to the Fed’s policies and other market conditions. Just because your bank is paying a certain percentage on savings accounts today doesn’t mean they will still be offering that same rate in six months (or even next week). With a CD, you get a guaranteed rate for the length of the CD’s term. The APY offered on a CD can vary, depending on the length of the CD’s term.
Something else to consider is whether you’re in a falling interest rate environment or a rising interest rate environment. If you believe that interest rates are going to stay at their current level or go down, now could be a good time to lock in a CD that pays a higher yield than you might get from a savings account. But if interest rates go up, and you’re locked into a longer-term CD, you could miss out on the growth potential of higher-yielding investments. In a rising interest rate environment, locking up your money in a CD for too long could be a risky move.
| Feature | CD | Savings Account |
|---|---|---|
APY | Fixed for term of CD | Variable, not fixed; may offer higher rates for larger balances |
Deposits | For traditional CDs, only an initial deposit | Unlimited deposits |
Withdrawals | If before end of term, usually will incur a penalty | Some types of withdrawals may be limited to six per month |
Minimum Balance | Will vary by institution | Will vary by institution |
FDIC/NCUA Insured? | Yes | Yes |
When Should You Choose a Savings Account?
There are a few financial situations that make a savings account a better place to save your money:
- You need a place to put your emergency fund. If you are still building up your basic cash emergency fund, a savings account is a no-brainer solution. Most experts recommend that people have three to six months of expenses stashed away, and an FDIC- (or NCUA-) insured savings account is an ideal place to keep this money.
- You have some short-term savings goals. If you have a financial goal that is only a few years away, you might want to keep that money in a high-yield savings account instead of putting it into riskier investments like stocks. Short-term goals include saving for a down payment on a new car, a home improvement project or a vacation.
A savings account is often the best and simplest choice for where to keep your short-term savings. It’s safe, it’s liquid and, depending on which high-yield online savings account you choose, you might earn the same or higher yields than you could get from a CD.
Pro Tip
Are you worried that interest rates might go down in 2024? The best CDs let you lock in a higher APY for a longer term, while savings account rates are variable and could decrease along with interest rates.
Pros and Cons of Savings Accounts
| Pros | Cons |
|---|---|
Savings accounts are highly liquid, giving you the flexibility to take your cash out anytime. | Your savings account may be limited to six “convenient transfers and withdrawals” per month. |
The best savings accounts can pay APYs that are competitive with the best CD rates. | Savings account APYs could go down if interest rates get cut. |
Savings accounts are typically insured by the FDIC or NCUA. | Riskier investment assets like stocks might yield a higher return than a savings account. |
They are a convenient place to keep your emergency fund or other short-term savings. | Savings accounts are not usually a good choice for long-term investment goals. |
There’s no commitment—save for short-term goals or use your cash for immediate unexpected expenses. | Cash deposited in savings accounts may lose value to inflation. |
When Should You Choose a CD?
There are several questions you should ask before putting your money into a CD. CDs are not the right choice for every situation; some online savings accounts might even pay higher yields than you can get from a CD, without the longer-term commitment.
But there are a few specific scenarios where a CD might be the best choice for your savings:
- You have a specific short-term time frame to maximize your savings. If you are saving for a specific goal—such as a life event or wedding celebration, a new car, a new home purchase or some other major purchase—that has a short-term target date, getting a CD with a term that fits your timeline might be the best way to maximize the yield on your savings.
- You have low risk tolerance and are comfortable with low fixed yields. If you’re a retiree, or someone who needs to maximize short-term investment income without the risks of the stock market, CDs might be worth considering. Depending on your situation, CDs could help you earn fixed-rate, low-risk investment income.
CDs can be a worthwhile part of your overall savings plan. But whether you should invest in a CD depends on a variety of factors. Assess your financial situation and goals before purchasing a certificate of deposit.
Pros and Cons of CDs
| Pros | Cons |
|---|---|
Earn a guaranteed APY for the duration of your CD term. | Most CDs charge an early withdrawal penalty if you take out your cash before the term is up. |
If interest rate cuts are on the horizon, the best CDs can help you lock in a higher APY than you might be able to get in the future. | CDs are not the best choice for emergency savings. |
You can use a CD ladder strategy to lock in some longer-term APYs while keeping some cash more available in shorter-term CDs. | CDs lack flexibility compared to a savings account. |
Like savings accounts, CDs are typically FDIC- or NCUA-insured. | Stocks, bonds, or other investments could offer a higher return than CDs. |
CDs are a smart choice for medium-term savings goals. | Cash deposited in CDs could lose value to inflation. |
No-penalty CDs let you take out your cash without early withdrawal fees. | CDs might not be the best choice for long-term investment goals. |
Bottom Line
You have options when it comes to choosing where to put your savings. The best choice for you depends on your investment time horizon and overall financial goals. Keep in mind that savings accounts and CDs are generally considered to be short-term, low-risk and low-yield savings vehicles for short-term financial goals.
If you’re 30 years old and saving for retirement, you should not put your retirement money into a savings account or CD. Even the highest-yielding online savings account or longest-term CD won’t deliver the levels of lifetime growth that you need from your long-term investments.
It’s important to understand the advantages and disadvantages of any investment or savings vehicle before you commit your money. But, if you’re still building up your emergency fund, if you need liquid cash savings for a short-term financial goal or if you’re a retiree who needs low-risk investments with a decent yield, then either a high-yield savings account or a CD can be an important part of your financial foundation.
Compare Other Banking Options
- Checking vs. savings accounts
- Money market vs. checking account
- Money market account vs. savings account
- CD vs. money market account
- Savings vs. CD vs. money market account
Frequently Asked Questions (FAQs)
Which savings account will earn you the most money?
You’ll likely earn a higher interest rate from an online savings account compared to one at a brick-and-mortar bank or credit union. The best way to find the highest rate is to comparison shop to make sure you’re getting the highest rate available for the account that best fits your needs.
How much money should I keep in a savings account?
The answer depends on the amount you need to feel comfortable. It’s common for people to keep their emergency savings in a savings account, which can be anywhere around three to six months’ worth of expenses. Keep in mind that the federal government insures most bank and credit union accounts up to $250,000.
How do you open a savings account?
To open a savings account, you’ll need to complete an account application and provide proof of identity and your address. Many institutions allow you to complete this process online.
At some banks, you’ll also need to make an opening deposit. You should also ask whether the account requires a minimum balance in order to earn interest.
How do you open a CD account?
To open a CD account, you’ll need to complete an account application, provide proof of identity and address and make a deposit to fund the CD. Prior to applying, you’ll need to decide the amount of time you want to keep your money on deposit. CDs typically offer terms of 3 to 60 months. Banks and credit unions often will offer higher annual percentage yields on CDs with longer terms.
