You already know that saving money is critical to meeting your financial goals, but choosing the right type of bank account is just as important. Although there are many kinds of accounts, two of the most common ways to save are certificates of deposit (CDs) and savings accounts. Understanding the key features of each type of account will help you choose the best one for your goals.
How do CDs work?
With CDs, it’s all about timing. When you open a CD, you agree not to withdraw the funds until the maturity date, which varies from a few months to several years after you open the account, depending on the term you choose. You can close a CD before the term ends, but you typically will pay an early withdrawal penalty, so you only want to deposit funds you won’t need right away.
How do savings accounts work?
With savings accounts, it’s all about accessibility. A savings account allows you to earn interest on the money deposited into the account. Unlike a CD, the funds do not have to be held in the account for a specific period of time before you can withdraw them. Depending on the bank you choose, you may be able to access your savings account with an ATM card. However, be aware that federal law limits certain types of telephone and electronic withdrawals (not including ATM withdrawals) and transfers to six per statement cycle.
Which type of account offers better interest rates?
It depends. Annual Percentage Yields (APYs) for both CDs and savings accounts vary by financial institution and may be affected by how much you have deposited and how long you leave your funds in the account, among other things. That said, CD rates are usually higher than the rate you’ll receive when you place the same amount into a savings account for the same amount of time. Additionally, CDs come with a variety of different terms, designed to meet different savings goals.
Which account is best for your goals?
Now that you know a little bit about these accounts, consider your savings goals. A CD may be a good choice if you have a set deposit amount and a long-term savings goal. Its maturity date ensures that your interest rate will not change for a set length of time. In addition, CDs with longer terms usually offer higher interest rates. Great interest rates and built-in savings discipline can make CDs a smart choice for long-term savings, but be sure you understand the features and terms of any CD you choose.
The flexible access of a savings account makes it a great place to park your funds for short-term savings goals. You can make regular deposits and withdrawals (within federal limits), and still earn interest, without worrying about withdrawal penalties. Putting a few simple strategies into practice can help you make the most of your savings account.
Last Edited: November 11, 2017