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CD vs. savings account: Which should you choose?  

What we'll cover

  • Differences between savings accounts and CDs

  • Pros and cons of these accounts

  • How to determine which is right for you

If you’re consistently putting money aside (good for you!), you may be wondering where the best place is to put it. If you’re deciding between a CD or savings account, you’ve come to the right place. Let’s explore the differences between these two types of accounts.

A savings balance is easier to access for immediate needs, and it can allow you to stockpile significant amounts of cash over time. Certificates of Deposit (CDs) can be more difficult to access but safely age at a locked-in rate.

Both one-year 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.

What is a savings account?

A savings account is a type of account that allows you to deposit money in a bank or credit union account and earn a small amount of interest. Savings accounts at FDIC-insured institutions are federally protected up to $250,000 per depositor for each qualifying account ownership category and allow you easy access to your money.

You may want to consider using a savings account to save for an emergency fund or other goals, such as a vacation fund.

Check out the pros and cons of savings accounts.

How do savings accounts work? 

You can open a savings account at a bank or credit union by filling out an application online, in person at your bank or via phone. When you put money in the account, eventually, the bank pays interest on the balance through an annual percentage yield (APY). The higher your calculated APY and the more you deposit into your account, the more account growth you'll experience.

Some savings accounts may limit how many withdrawals you can make per month, including debit and check transactions and various types of transfers. Be sure you are comfortable with the withdrawal limits your bank may have.

Savings accounts at FDIC-insured institutions are federally protected up to $250,000 per depositor for each qualifying account ownership category and allow you easy access to your money.

When should you 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 a vacation, your emergency fund or saving for a piece of furniture, you may want to consider getting a savings account.

Tip: Online banks don’t have the same overhead costs that 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 .

What is a CD? 

What is a CD, exactly? 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 at a fixed rate, which means your rate will stay the same 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 APYs (annual percentage yields).

Learn more about the types of CDs .

How do CDs work? 

When you sign up for a CD, you deposit money and agree not to make withdrawals for a certain period of time. When this time-bound deposit is up, you get your money back, plus whatever you earned in interest based at the interest rate advertised. The bank rewards you by paying you a higher interest rate than a regular savings account or money market account.

You can choose from several CD term lengths, commonly six, 12, 18, 24 and 30 months or three to six years. You may be able to choose a different term length, depending on the institution.

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 an early withdrawal penalty , which can eat into your returns.  Ally Bank’s No Penalty CD allows you to withdraw your full balance and any interest earned any time after the first six days of funding your CD with no penalty.

When should you choose 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 have a vacation coming up in a year and want to put money away. If you have a short-term or long-term timeframe, you can use a CD to fund these goals based on when you'll need the money.

In addition, if 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 get hit with an early withdrawal penalty.

Furthermore, if you have a low risk tolerance or prefer low fixed yields, you may want to consider a CD for guaranteed income. 

Deciding what’s best for you: A CD or savings account

So, is a CD better than a savings account? It depends on your goals. 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. On the other hand, you can "lock in" a higher rate with a CD, especially a high yield CD , which may offer more returns. Use a savings interest calculator to help you decide whether a CD or savings account makes sense for you. You can open a bank account online once you make a final decision.

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