If you’re looking to save up cash for an upcoming vacation, retirement, or just a rainy day, savings accounts and Certificates of Deposits (also called CDs) can both be great options to consider.

But make no mistake: the two aren’t interchangeable. While CDs can prove to be solid long-term options, they might not be best if you’re looking for more immediate savings—or easy access to your cash. Likewise, traditional savings accounts might be good in the short-term, but they’re not best if you’re hoping to maximize the interest you earn over time.

Do you need help determining which savings product is best for your household’s financial goals? Then read on.

Certificates of Deposit vs. Savings Accounts: Which Should You Choose?

Savings accounts and CDs are both financial products designed to help you save money and earn you interest on that money. Though they share some similarities, the two products are largely different—particularly in how much interest you can earn and how easily (and quickly) you can access your funds.

Here are the key differences you’ll want to keep in mind when making your decision:

• Interest rates – CDs tend to have higher interest rates than savings accounts, allowing you to earn more in the long run. The longer you agree to hold the money in the account, the higher the interest rate you’ll likely receive.
• Withdrawal rules – CDs generally don’t allow for regular withdrawals. Instead, they come with a set withdrawal date. If you take money out before this date, you’ll pay a penalty on top of the funds you withdraw. Though some saving accounts do have transaction limits, these are less common (and usually less expensive) than those on CDs.
• Minimum balances – Savings accounts almost always have some minimum balance requirement. If you go below this, you’ll incur a fee or penalty. CDs may or may not have these requirements.
• Predictability – CDs come with a set interest rate for the full term, allowing you to predict your long-term earnings on the account. Savings accounts generally have floating rates that could change annually (or more than that), making it harder to estimate your potential earnings over time.

In our experience, savings accounts are best for your short-term, everyday savings efforts, while Certificates of Deposit are better suited for those long-haul, future goals. If you won’t need to access the funds for at least a year (ideally longer), then a CD is likely the right fit. If you might need the money sooner, a savings account is probably better. 

A Two-Pronged Approach

You don’t have to choose just one or the other. Using both CDs and savings accounts in tandem can help you achieve your short- and long-term financial goals, while also maximizing your interest earnings down the line.

Not sure if this is the right move for your household? Need more advice on which savings product is best? Consult a local banker for help. 

References

1. Tony Armstrong (October 9, 2018). What Is a CD (Certificate of Deposit)? Retrieved from https://www.nerdwallet.com/blog/banking/cd-certificate-of-deposit/
2. Tony Armstrong (March 18, 2019). Banking: CD Early Withdrawal Penalties Can Cost You. Retrieved from https://www.usatoday.com/story/money/personalfinance/budget-and-spending/2018/03/18/banking-cd-early-withdrawal-penalties-can-cost-you/32749951/
3. Spencer Tierney (July 1, 2018). Are Certificates of Deposit Worth it Right Now? Retrieved from https://www.usatoday.com/story/money/personalfinance/lifestages/2018/07/01/are-certificates-of-deposit-worth-it-right-now/36295599/