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CDs Vs. Savings Accounts: Which Is The Best Alternative To A Checking Account?

Sarah Li Cain6-Minute Read
November 18, 2021

There are plenty of things to do more with your money other than let it sit in a checking account. You can consider other types of accounts that help you earn some interest, while ensuring your principal amount stays intact. Even a small amount of interest accrued can be significant for situations such as major purchases or emergencies.

Two options are CDs and savings accounts. The question is, how do you pick between a CD and a savings account? Let’s take a closer look at what these types of accounts are, and how to know which one is best suited for your needs.

Defining CDs And Savings Accounts

A certificate of deposit, or CD, is a type of account that gives you the opportunity to earn a guaranteed amount of interest within a predetermined time frame. You make an initial deposit to open the account and you need to keep those funds in the account until the maturity date. In many cases, you won’t be able to make additional deposits. Rates may be fixed or variable, and will depend on factors like your maturity date. In general, the longer the maturity date, the higher the interest rate.

After the CD matures, you can withdraw the money – including interest earned – renew your CD or roll it over to a new CD term. People tend to open CDs if they want to save a chunk of money toward a goal and won’t need to use it until a specific date.

Savings accounts on the other hand, are generally more flexible in that there is no maturity date – though you may be limited in the number of withdrawals you can make each month. This type of bank account allows you to also earn interest, and the rate is usually based on the federal funds rate. That means your APY, or annual percentage yield, may fluctuate depending on how interest rates fare. Financial institutions tend to offer various types of savings accounts such as traditional and high-yield savings accounts.

Key Differences Between CDs And Savings Accounts

One of the main differences between CDs and savings accounts is the manner in which you can deposit and withdraw funds. With savings accounts, you can make as many deposits as you want, though you may be limited on the number of withdrawals you can make each month. Some banks may charge fees for what it deems excess withdrawals.

You’ll generally be able to withdraw as much as you want at one time, as long as you still have a positive balance in your account. Depending on your savings account, you may also be required to keep a minimum balance – either to ensure your account remains open, or so you can earn interest on your deposits.

CDs, on the other hand, typically allow you to make only one deposit when you open the account (though some banks offer exceptions), and you won’t be able to withdraw your cash until the maturity date. If you do, you’ll face early withdrawal penalties – a fee you’ll need to pay to access your money earlier than agreed. This amount will depend on the bank or credit union, though it’s typically based on the amount of money you withdraw, and the length of time between your withdrawal and the maturity date.

Both accounts also differ in terms of the APY you’ll earn. With CDs, your rate is guaranteed until the maturity date — some banks or credit unions may offer accounts in which you can get a one-time rate increase. Savings accounts, however, don’t guarantee rates – it can go up or down depending on the rates set by the Federal Reserve. APYs for CDs are generally higher than savings accounts.

Both types of accounts do offer FDIC coverage – your money is insured up to $250,000 per account type at the same financial institution.

Opening A CD Or Savings Account

Opening either a CD or savings account will be a similar process. Once you decide on the account you want to open, you’ll need to provide required information such as your name, mailing address, birth date, and a government-issued ID.

Then, you’ll need to choose the product you want. For CDs, you’ll be asked to pick an account with a specific maturity date. Banks and credit unions may offer a myriad of options, so be sure to do your research beforehand.

After entering all required information, you’ll need to make your initial deposit. In most cases, minimum requirements are higher for CDs than they are for savings accounts. You’ll find that depending on the savings account, many don’t require an opening deposit. If they do, it’ll be for less than $100.

CDs, on the other hand, will require you to deposit typically around $1,000 or more. After all, you’re only making one deposit and letting the interest accumulate. That’s why this type of account is best for those who want to set aside a chunk of money toward their savings goals.

There are plenty of places you can open a savings or CD account: at your local bank or credit union, or online banks. Be sure to check that whichever financial institution you go with is FDIC-insured so you know your cash is safe.

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Figuring Out Which Is Best For You

Both types of accounts are great to help you with short- and medium-term savings goals, but you can choose one or the other depending on why you want to save money.

Opening a savings account is a smart choice if you have a small sum of money and want to set it aside for an emergency fund or a major purchase (for within the next few months), such as upcoming vacation.

The idea is to let the money sit there, while earning some interest, ready for you to access at a moment’s notice. You don’t want to have to jump through hoops to take money out for an emergency car repair, for instance. Plus, if you have a small amount of money, you may not be able to meet the minimum deposit requirements for a CD – you can use your savings account to save up until you do.

CDs are best suited for those who can meet the minimum deposit requirements and want to set aside the cash for a medium-term goal, such as within a few years. It’s also best suited for those who want to make sure the cash is there, ready to use, within a certain time frame.

For example, you have enough money saved for a down payment, but you’re not ready to buy a house for the next 6 months. You can open a CD account for that length of time until you’re ready to go house hunting.

Remember, you may face early withdrawal penalties if you take cash from a CD before the maturity date. If you’re unsure of when you’ll need the cash, it may be best to stash it in a savings account so you can access it whenever you need to.

The Bottom Line

Choosing between a savings and CD account means determining what you want to use your funds for, and when you’ll need the money. A savings account is a smart idea if you want to set aside money for an emergency fund, or a large purchase you want to make, but you’re not sure when.

A CD is for those who have a larger sum of cash and want to take advantage of potentially higher rates than what a savings account offers. Since you’ll have to agree to leave in the cash for a set period of time, a CD is better for those who won’t need access to the cash for the next little while.

No matter which option you choose, make sure you shop around for the best rates and terms. Read the fine print so you know what you’re getting into. Plus, you want to get an account that is FDIC-insured so up to $250,000 of your money will be protected.

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Sarah Li Cain

Sarah Li Cain is a freelance personal finance, credit and real estate writer who works with Fintech startups and Fortune 500 financial services companies to educate consumers through her writing. She’s also a candidate for the Accredited Financial Counselor designation and the host of Beyond The Dollar, where she and her guests have deep and honest conversations on how money affects our well-being.