Savings Account vs. CD: What's the Difference & How to Choose?
In March, the Federal Reserve slashed interest rates to near-zero. While this is beneficial for a number of reasons, it means that now is a better time than ever to begin thinking about how to get more out of your money.
Saving money, whether it’s for something specific or simply as part of an emergency fund, is always a good idea. However, with interest rates as low as they are, you’ll want to start thinking about where you save money versus how you save money. Should you put it into a regular savings account or move it to certificates of deposit (CD)?
The answer depends on what you’re looking to do with your money in terms of growth and when you think you’ll want to access the cash again. Here’s everything you need to know about savings accounts and CDs and how to choose the right one for you.
What to Know About Savings Accounts
A savings account is a type of bank account that allows you to earn interest on your money. You can usually open a regular savings account when you open a checking account with a bank, but if you’re interested in better rates, you’ll want to ask about a high-yield savings account, which tend to come with better APYs.
Overall, savings accounts are much more flexible than CDs as you’re able to withdraw cash from your savings account or move it around (nearly) as much as you’d like. Federal law does limit your withdraws to six per month. But, that’s quite a bit when compared to a certificate of deposit.
Online banks tend to offer higher interest rates, but interest rates for savings accounts can be anywhere from 0.01% annual percentage yield to as high as 2% (it’s important to note that interest rates can go higher, but the average is much less than 2%).
What to Know About CDs
There’s a lot to love about CDs, which is short for a certificate of deposit. However, it comes at the expense of not being able to touch your cash if or when you need it. To begin with, CDs often come with a fixed interest rate over a set period of time. Interest rates on savings account change over time; CDs come with a fixed interest rate.
When you put money into a CD, you’re receiving a higher interest rate in exchange for restricted access to the funds. The length of a CD ranges anywhere from three months to five years, all with their own interest rates and features.
And, because they come with a fixed interest rate, it means that you’ll want to be smart about when you invest in a CD. If rates drop, you’ll be glad you invested when you did. However, if rates rise then you might lose out on extra cash because your interest was locked in at a lower rate.
Savings Account vs. CD: Which is Better?
It’s hard to say which is better when it comes to the debate of savings account vs. CD. Each offers their unique perks, with the biggest one being the higher interest rates for a CD compared to the fact that, with a savings account, you can withdraw your money whenever you want.
You should opt for a savings account if:
- You know you will need to access your funds immediately in an emergency or at some point within the next few months to a year.
- You think interest rates will go up and don’t want to be locked into a fixed interest rate with a CD.
- You simply want to grow your savings somewhere safe.
You should opt for a CD if:
- You already have a rainy day fund and know you won’t need to access your money in the following months.
- Interest rates are looking like they’ll drop and you want to lock in a higher APY at the moment.
- You need to collect more return on your investment through the higher APYs that a CD offers you.
The Bottom Line
So, which one is better? A high-yield savings account is a great idea for those who want to grow their savings over time and will need to access the cash at various points in the near future. If you are financially comfortable and have access to an emergency fund, think about investing in a high-earning CD.
For most savers, a high-yield savings account is sufficient as most savers don’t have the luxury of not being able to dip into a CD in an emergency. If you find yourself in that position, think about banking with an online bank. They tend to offer better APYs on general accounts without the hassle of even visiting a traditional bank or having to worry about selecting the right CD.
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