Whether you’re a consistent saver or you have just started to put money aside, you might wonder which type of account is right for you. Two common choices are a high-yield savings account and a certificate of deposit, or a CD. Both CDs and savings accounts are great options for saving, but what’s best for you depends on your goals and the kind of access you need to your money.
Read more: How Ally Bank’s buckets and boosters push your savings further
Understanding the basics
A savings account is easier to access for immediate needs and offers variable interest rates that can change over time. CDs can be more difficult to access but earn interest at a locked-in rate that can be higher than a savings account.
What is a CD?
A CD is a deposit account, like a savings, money market or checking account. When you open a CD, you deposit a specific amount of money for a specific period at a fixed rate, which means it will remain consistent until the CD matures. At that point, 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 annual percentage yields (APYs).
What is a savings account?
A savings account is a type of deposit account that allows you to set aside money in a bank or credit union account and earn a small amount of interest. You may consider using a savings account to save for an emergency fund or other goals, such as a vacation fund.
A savings account is easier to access for immediate needs and offers variable interest rates that can change over time.
Comparing CDs and savings accounts
While both accounts offer ways to save money and earn interest, they have key differences.
Features | CDs | Savings Accounts |
|---|---|---|
Interest rates and earnings | Generally, offer higher, fixed interest rates | Generally, offer interest rates that are not fixed |
Accessibility and flexibility | Come with a term length and potential penalties for early withdrawal | Can withdraw money at any time without penalty, however there may be a limit on how many withdraws can be made in a statement cycle |
Federal Deposit Insurance Corporation (FDIC) insurance and security | FDIC-insured up to the maximum allowed by law | FDIC-insured up to $250,000 per depositor, per bank |
When to choose each option
Which account you choose will depend on your financial goals and how often you need to access your money.
When to opt for a CD
You may want to choose a CD when interest rates are high or when you have a specific savings goal that you want to achieve. For example, maybe you want to buy a house in a year. If you have a specific timeframe, you can use a CD to fund this goal based on when you need the money.
Or perhaps you want to eliminate the temptation to spend your money? You can use a CD to "lock up" your money for a period of time. (You can still take your money out of the CD, but you'll typically receive an early withdrawal penalty.)
If you have a low risk tolerance or prefer fixed yields, you may want to consider a CD.
When to choose a savings account
If you're looking for a way to separate money from your checking account for a specific savings goal, such as an upcoming trip or wedding, but still want some flexibility, you may want to consider a savings account. With an Ally Bank Savings Account, you can easily save for your financial goals with our savings buckets. This tool allows you to earmark money within your account for specific purposes. You may not quite receive the earnings you could get with a CD, but you can still earn a competitive interest rate on your savings account, just know it’s dependent on the national average rate.
Deciding what’s best for you
So, which account is better? It depends. For your short-term goals, consider a high-yield 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. On the other hand, you could lock in a higher rate with a CD, which may offer better returns.
