5 Key Differences Between CDs and Savings Accounts You Need to Know

If you are saving money for a short-term goal that you hope to accomplish in around five years or less, the stock market isn't the place for your funds. You need a safe investment option where you can ideally earn a reasonable rate of return but you won't risk losing money.

Savings accounts and CDs both fit the bill. Both are generally FDIC insured (meaning your money is protected from bank failure), and they can provide a reasonable rate of return without any risk. However, there are important differences between them that you need to know about to decide which is right for you.

1. Access to your funds

The biggest difference between CDs and savings accounts is how accessible your money will be.

If you have money in a savings account, you can generally take it out whenever you want without any penalties. Although some savings accounts have monthly withdrawal limits (like restricting you to six or fewer), it's usually very easy to work around those and access your cash.

When you invest in a CD, that's not the case. Although there are some no-penalty CDs that typically come with lower rates, most CDs are fixed-term. They have term lengths, which most often range from around three months to five years (although it is sometimes possible to get longer or shorter fixed-term CDs, they aren't as common).

If you get a fixed-term CD, you have to leave your money invested for the duration of the term to avoid a penalty. This makes CDs a bad option for savings you might need at unpredictable times, such as money in an emergency fund.

2. The interest rate you'll earn

The interest rate you're paid is another big difference between CDs and savings accounts. CD rates tend to be higher than the rate you'd be paid on a savings account.

For example, the national average interest rate on a savings account is 0.47%, while the national average rate on most CDs is higher. For example, a 3-month CD has a national average rate of 1.67%, while a 1-year CD has an average rate of 1.86%.

It is possible to get rates that are much higher than the national average for both CDs and savings accounts, especially if you opt for a high-yield account. In fact, in this current high-rate environment, you can find both products offering rates above 4.00%. But the data on national averages from the Federal Reserve shows overall trends and, in general, the best rates on CDs are almost always going to be better than the best rates on high-yield savings accounts.

So, if you're OK with locking up your money and want the best rate possible, a CD may be a better bet.

3. Whether your rate is guaranteed

CD rates are guaranteed for the entire CD term. So, if you get a competitive rate right now on a 5-year CD, you'll know you'll earn that return for the full five years even if interest rates go down during that time period.

Savings accounts usually have variable rates, and the return on investment you'll get on money in them can decline rapidly as interest rates fall. If you want a guaranteed yield, a CD is the better choice.

4. Minimum investment requirements

Many savings accounts do not have an investment minimum, or the minimum deposit required to open the account -- if it exists -- is typically pretty low. CDs, on the other hand, often require a higher minimum investment. Often, you'll be required to put in at least $500 and sometimes much more ($2,500 or higher) to be eligible to buy a CD.

If you don't have a ton of money available that you're looking to invest, a savings account may be the best choice.

5. Monthly fees charged

Finally, many CDs do not charge you a monthly fee. And while there are fee-free savings accounts out there, it's more common to be charged a monthly cost with savings than with a certificate of deposit.

While the monthly bank fee on a standard savings account may be as little as $5, this can still add up over time. You can search for a fee-free savings account or, if you don't mind giving up access to funds for a bit, put your cash into a CD instead.

Now that you know these five key differences between CDs and savings accounts, you can make the choice that's right for you about which of these accounts to put your money into.