CDs vs Savings: How to Pick the Best Account for Your Money

When comparing certificates of deposit (CDs) and savings accounts, borrowers should weigh their desire for high interest rates against the need to access their funds. Savings accounts and certificates of deposit (CDs) are like two sides of the same coin, which can make choosing between the two difficult. While it's recommended that you employ both in your savings strategy, we cover what the pros and cons are for each account.

Both CDs and savings accounts are excellent vehicles for saving money and earning interest, and both are relatively risk-free deposit products that are insured by the Federal Deposit Insurance Corporation (FDIC). This means that, unlike with stocks, bonds, and other non-deposit investments, the money you put in your savings account or CD will be safe even if your bank goes under.

However, savings accounts and CDs differ in a few key ways, including interest rates, withdrawal policies, and overall return on investment. We cover some key pointers when it comes to choosing between CDs vs. savings accounts.

What are the advantages of a CD?

A certificate of deposit is a type of savings vehicle that has a fixed interest rate and a fixed term, anywhere from one month to 10 years. In exchange for letting the bank hold on to your money for a set amount of time, you may get a better interest rate than you would with a traditional savings account or even a high-yield savings account, although your yield may depend on how much money you deposit and your term length.

With a CD, you know your interest rate and your term length from the get-go, which means you can calculate exactly how much money you’ll have when your certificate expires and you’re able to withdraw your cash. If you’re saving for the long term, a CD offers less interest rate risk and potentially higher earnings than comparable savings accounts.

What are the disadvantages of a CD?

The main downside of a CD is that your money is locked in for a set term and you cannot withdraw it early without paying a penalty. In most cases, you can expect to forfeit three to six months of earned interest for early withdrawal, although some accounts may allow you to make a single penalty-free withdrawal (per year or per term).

What this means is that, unlike with your savings account, you generally can’t access the money in a CD whenever you’d like. Depending on the term of your certificate, your money could be locked away for five or even ten years. The trade-off for a CD’s higher interest rate is an overall lack of liquidity.

Another factor to keep in mind is a CD’s minimum deposit. While there is no standard minimum, some banks may require you to put in tens to thousands of dollars upfront. If you’re looking for a place to stash a small amount of cash, a CD may not be the best option.

What are the advantages of a savings account?

A savings account is another type of deposit account. In general, savings accounts are more flexible than CDs — you put your money in, it earns interest, and you can withdraw funds or add more with less restrictions. High-yield savings accounts may even have interest rates that rival those of some CDs.

The key advantages of savings accounts include

Variable interest rates

Savings account interest rates shift as the market changes (unlike CDs, which have fixed rates until they mature). This means that your interest rate could go up over time, but it could also decrease.

Smaller minimum deposits

Most savings accounts require no minimum deposit to open and no minimum balance in some cases. CDs are likely to have higher minimum requirements you must meet, forcing you to save more of your funds in one place.

No time commitment

While CDs come with set terms in which you must leave the funds untouched to avoid penalties, savings accounts are flexible and have no time limit on how long you must keep your funds deposited in the account. It’s easier to deposit or withdraw your money at any time.

Easy access to funds

Savings accounts are more liquid than CDs. While there is a slight limit to how many transactions you can make in a month, you can generally withdraw from your savings account without paying any penalties.

What are the disadvantages of a savings account?

The biggest disadvantage of a savings account is that even those with the highest interest rates may have a lower yield over the long term when compared to CDs. This is because interest rates vary with the market — and sometimes with your account balance.

Some of the best high-yield savings accounts have interest rates over 2%, but rates could drop if the financial market changes. Of course, rates could also increase, but this is a situation you can’t predict.

CD vs. savings account: which earns the most interest?

In general, CDs have slightly higher interest rates than savings accounts. This differential may be even greater if you choose a CD with a longer term. But it’s not always that simple. Depending on current market rates and how long you plan to keep your cash in a CD or savings account, the latter might be a better fit.

CD vs savings example

For example, let’s say you deposit $1,000 in a high-yield savings account with a 2.1% APY and another $1,000 in a CD. You keep both for 6 months. For CD terms under a year, some banks offer interest rates under 1% — lower than what you’d earn with a high-yield savings account.

By contrast, if you keep those same accounts for five years, you’ll still earn 2.1% interest on your savings account (maybe a little more or a little less as the market fluctuates), but you could earn closer to 3% on your 5-year CD no matter what happens to market rates.

Yield vs liquidity

Ultimately, which account earns the most depends on the rates currently offered. If savings rates outpace CD rates in the short term, you could earn more with a traditional savings account. However if you’re confident that rates are likely to drop, you may want to lock in a portion of your savings in CDs.

CD vs. savings account: which is safer?

Both CDs and savings accounts are relatively safe places to stash your cash. Funds deposited at a bank are insured by the FDIC up to $250,000. Even if your bank goes out of business, your money is guaranteed to be safe.

FDIC and NCUA insurance

However, keep in mind that the $250,000 is the total amount insured across all of your savings deposit accounts at a single bank. If you have more than that in your savings accounts and CDs combined, the extra amount won’t be covered by FDIC insurance.

In either case, it’s worth spreading that larger amount across accounts at several banks, as you’re insured for up to $250,000 at each. If you keep your funds at a credit union, your money is protected (up to $250,000) by the National Credit Union Administration (NCUA), which essentially serves the same function as the FDIC.

Avoid withdrawal penalties

CDs may be a little bit safer than savings accounts in a certain sense: Because you have to pay a penalty for early withdrawal, you may be less likely to use funds from your CD for anything other than their intended purpose at the end of your fixed term. Savings accounts do have penalties for making too many withdrawals in a short time period, but in general, the funds are much more accessible and subject to spending.

CD vs savings account: which should you choose?

A smart savings plan may include both CDs and a savings account. How exactly you structure your CDs and savings accounts will depend on your financial goals.

“You need to know what your cash flow needs are for your short-term, medium-term, and long-term goals, so you have to match your investments to your needs,” says Allan W. Moskowitz, a certified financial planner and principal at Transformative Wealth Management in El Cerrito, Calif.

For example, a 10-year CD with a fixed interest rate could be a good choice for growing an education fund for your kids because you know exactly how much money you’ll have at the end of your account term. It may even be worth setting up a CD ladder of various terms to meet several different savings goals or make your funds more liquid in the interim.

By contrast, a savings account could be a better fit for building an emergency fund because there’s no penalty for withdrawing cash to replace a broken water heater or pay for unplanned car repairs.

Before you put all your money in one place, determine what you’re saving for and calculate how much you might need to withdraw in the event of an emergency. After taking into account your long-term savings goals as well as your short-term cash needs, you’ll be better equipped to figure out your optimal allocation to CDs and savings.

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