CDs vs Saving Accounts – Which Is Better For You?

Last Updated: August 21, 2019
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Both saving accounts and Certificates of Deposits (CDs) considered as a safe, reliable and solid investment. However - there are a couple of differences between them you have to understand before getting a decision. CDs vs Saving Accounts - which of them is the right investment for you?

What is a Savings Account?

When we talk about a savings account we’re talking about an account with your bank that lets you deposit money and leave it there while earning interest. Just about any bank, credit union or other financial institution that offers these types of accounts is actually insured by the FDIC and they pay you interest. Of course, those interest rates don’t tend to add up to much, with the average being 2 percent or less annually as of the middle of 2019. But you may be able to find some savings accounts that come out a little better.

How does it work?

The way it all works is that a savings account is considered a time deposit.

That means that your bank is actually allowed to put restrictions and limitations on your ability to take money out, like requiring notice or charging a penalty.

You generally won’t find banks that do this, but you may find ones that will tell you that your number of transactions on a savings account is limited by the month. On top of that, they may charge you fees based on your balance and they usually aren’t going to give you checks for this account.

You’ll find that transferring funds into your account and even out of your account are quite easy, but the federal government actually imposes restrictions on how many and what kind of withdrawals you can make in a single statement cycle (usually a month). Deposits won’t have any of these restrictions, but you may not be able to make as many telephone or electronic withdrawals as you want, since they’re limited to 6 per statement cycle.

What are Certificates of Deposit (CDs)

When we look at a CD, it’s actually an agreement that you enter into with your bank or a financial institution for a set period of time called a term. You give the bank your money and the bank gives you interest as a result.

For those who aren’t going to need their money for a little bit, this is a great way to earn some extra interest.

How does it work?

This is actually another form of a time deposit, but in a slightly more restrictive form than with the savings account. You agree to keep the money agreed in a specific account for a set amount of time (generally 6 months, 18 months, 1 year, etc.)

If you agree to a longer term you’re generally going to get a better interest rate. In fact, you could find a 5 year CD with an interest rate of 3% or higher annually. What you’re generally going to find is that the APR is fixed, meaning that it stays the same for the entire term.

We’ll look at some exceptions to these rules, but in general, your CD will ‘mature’ at the end of the term you agreed and you get to make a decision about how you want to proceed. As you get close to this point the bank is usually going to let you know that you have choices. If you choose not to act you may end up with the money cycled into a new CD of the same term.

The Differences: CDs and Savings Accounts

CDSavings Account
Term6, 12, 18, 60 months or moreNo Term
Minimum BalanceNone – 5,000 +None
InterestApprox. 3%Approx. 2%
Withdrawal RestrictionsNo withdrawals before maturity3-6 per month
FeesLow to noneLow to none
ProtectionUp to $250,000 per account holderUp to $250,000 per account holder

Bump Up Your Interest

With a CD you’re going to have the best interest rate if you agree to leave your money in the account for a longer period of time. In fact, with a 5 year agreement you could get above 3%, which is a great rate.

When it comes to savings accounts you’re generally not going to get a great rate, but you’ll be able to get some extra money from interest.

You just want to make sure you take a look at what’s out there to see if you’re getting the best rates.

Limits on Spending and Withdrawal

When it comes to a savings account, the Federal Reserve Board’s Regulation says that banks are only allowed to give you a maximum of 6 withdrawals from either a savings account or a money market account in a month. These actually apply to a number of different types of transactions, but not to withdrawals that are made through an ATM or through an in-person visit.

When you look at CD’s, however, you have to agree to leave the money in the account for the full period of time. There are no withdrawals allowed without incurring a penalty. That penalty amount could vary but it’s usually based on the amount of money you need to take out, the amount that you originally had in and the bank that you made the agreement with.

Minimum Balances

For a savings account, you’re generally not going to have a very high minimum because the goal is to get you to save your money.

For some, you may not even have any minimum at all and you may not have to have a minimum or average daily balance either. On an online saving account – usually, there is no minimum at all.

When it comes to CD’s you may be able to get one for just about any dollar amount as well.

Top Notch Protection

You want your money to be safe, and keeping it stored in your home is definitely not safe. When it comes to using a financial institution, however, you’re going to have a balance of safety and risk. That financial institution will have a lot of your personal information and they should definitely be careful about keeping it safe. One way they do that is by insuring your savings and your checking accounts under the Federal Deposit Insurance Corporation. They’re insured up to $250,000, completely free of charge and without having to opt in.

What Do You Want?

There are a couple of different things to keep in mind when you’re looking at whether to get a savings account or a CD.

  • Do you need the money soon? If you will then a CD is not the way to go because you’ll have a set period where you can’t get it.
  • What type of investment do you need, long-term or short-term?
  • Are you looking for the highest profit with less flexibility or the lower profit with more flexibility?

If you aren’t going to need your money then a CD is a good way to go. Instead of the no-interest checking account, you might otherwise use, this is going t ogive you some pretty good yield.

If you have money and you have enough patience to wait around you can actually use a CD ladder to get the most for your money.

If you want money available for emergencies and you want to have access to your money you’ll probably want a savings account instead.