When saving money for future goals, two common options are certificates of deposit (CDs) and savings accounts. Both can help you grow your money while keeping funds secure. Understanding the differences between CDs and savings accounts can help you decide which option may be right for you.
What is a Certificate of Deposit?
A Certificate of Deposit (CD) is a savings product that allows you to deposit money for a fixed period of time, known as a term. In exchange for leaving your money in the account for the full term, some CDs may offer competitive interest rates compared to traditional savings accounts.
Common CD terms may include:
- 3 months
- 6 months
- 1 year
- 3 years
- 5 years
With most CDs, withdrawing funds before the term ends may result in an early withdrawal penalty and/or fee.
What is a Savings Account?
A savings account is a deposit account that allows you to earn interest while still keeping your money accessible. Saving accounts are often used for:
- Emergency funds
- Short-term savings goals
- Everyday financial flexibility
Key Differences Between CDs and Savings Accounts
Access to Funds: Saving accounts generally allow easier access to your money. CDs are designed to keep funds deposited until the maturity dates.
Interest Rates: CDs often offer fixed interest rates for the length of the term. Some savings accounts may offer competitive interest rates while still allowing easier access to funds.
Flexibility: Savings accounts are typically more flexible because deposits and withdrawals can be made more easily. CDs may be better for money you do not plan to use right away.
When a Savings Account May Be Better
A saving account may make sense if:
- You want quick access to your money
- You are building an emergency fund
- You are saving for short-term goals
- You want more flexibility
When a CD May Be Better
A CD may make sense if:
- You can leave money untouched for a set period
- You want a fixed interest rate
- You are saving for a future financial goal, like a down payment on a house.
- You want predictable returns on your savings
Can You Use Both?
Many people use both saving accounts and CDs as part of their savings strategy. A savings account can provide flexibility for short-term needs, while CDs may help grow money set aside for future goals.
Both CDs and savings accounts can help you save money while earning interest. The right option depends on your financial goals, how soon you may need access to your money, and whether you prioritize flexibility or potentially higher fixed returns.
