A lot can happen in a year—besides just getting another year older.
Your savings balance can grow significantly in 12 months if it’s in the right place at the right time. Certificates of deposit (CDs) and savings accounts are great options for short-term saving, but what’s best for you depends on your goals, the kind of access you need, and what’s available in the market. Here are a few things to consider as you weigh your choices.
Understand the basics of both types of accounts.
Let’s start with the fundamentals—what is a savings account? A savings account is a simple, safe, reliable place for your money that earns interest and is easily accessible. Savings account features, like minimum deposit or minimum balance requirements, vary by bank, and higher balances may qualify for higher APYs.
What is a CD? A CD is a deposit account, like a savings, money market, or checking account. But when you open a CD, you deposit a fixed amount of money for a specific period of time. When the time is up, or the CD matures, you can cash it out or “roll it over” for another term. CDs may or may not have minimum deposit requirements, but higher balances may qualify for higher APYs (annual percentage yields).
Take a look at the following chart for a quick visual comparison:
CDs are likely to offer higher interest rates.
Finding the highest interest rate you can is an obvious place to start. A great rate combined with the power of compound interest can significantly impact the growth of your savings. Plug your numbers into a CD calculator like this one to see your potential earnings with different APYs.
What’s more, CDs with 12-month terms usually have fixed rates. That means you “lock in” that interest rate for the term of the CD, so there’s no danger you’ll get stuck earning less than you signed up for. (If you have a bit longer to let your money grow, you might also take a look at “bump up” CDs like the Ally Bank Raise Your Rate CD, or a long-term Ally Bank High Yield CD).
CDs usually have early withdrawal penalties.
A CD usually requires you to keep the money in the account until the end of its term, in other words, until maturity. If you end up needing the money before then, you’ll likely end up paying a withdrawal penalty, which can eat into your returns.
So, for that 12-month stash, consider choosing a CD if you have a fixed amount to deposit and don’t need to access the money before the term is up.
Savings accounts offer flexible access.
With a savings account, you can make regular deposits and withdrawals (within federal limits) all while earning some interest on the balance. And the ability to automate things like payroll deposits and transfers makes savings accounts easy to manage. Look for savings accounts that don’t have minimum deposit or minimum balance requirements.
Savings accounts can have limited returns.
If you don’t pay attention to your savings account rates, you could easily miss out on significant interest earnings. Many major banks offer paltry APYs on their savings accounts, so do your research to find a savings account that’s competitive, especially if you’re trying to beef up that balance toward a short-term goal. Use a calculator, like this one, to estimate your earnings with different APYs.
Ally Tip: online banks don’t have the same overhead costs the brick-and-mortar banks do, so they can pass that savings on to you in the form of great rates. You may not quite match the returns you’ll find on a CD, but you can—and should—expect to earn a competitive interest rate on your savings account, especially an online savings account.
So for your short-term goals, choose a savings account if you want to keep adding to the balance while you save, or if you anticipate needing access to the cash in a pinch.
So what’s best for you?
Whether a one-year CD or 12 months in savings is best for you depends on your priority for that money. Do you want to “lock in” the highest rate you can or do you need access to the funds? Understanding the features of savings accounts and CDs can help you make the best choice for your money—and get the most out of your year.