Published in: Banks | Aug. 20, 2019

Savings Accounts vs. CDs: What Are the Key Differences?

By:  Lyle Daly

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Not sure if you should get a savings account or a CD? First you need to know the major differences between them.

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If you’re looking for a safe place for your money where it can still earn some interest, two of the most popular banking products are savings accounts and certificates of deposit (CDs).

With both products, you can deposit your money and earn interest on it, but that’s where the similarities end. Savings accounts and CDs work very differently, and the product that’s right for you will depend on your current financial needs.

To help you pick between savings accounts and CDs, we’re going to examine the key differences that set them apart.

Term length

Savings accounts:

  • Open-ended

CDs:

  • Fixed

A stark difference between these products is that when you open a CD, you’re depositing your money in there for a fixed length of time. For example, with a one-year CD, you would need to wait that full year before receiving your initial deposit and the interest it has accumulated. If you want to withdraw the money earlier than that, then you’ll lose a portion of your interest as a penalty.

Banks generally offer CDs for between one and five years, but some will also have CDs with shorter or longer terms.

With a savings account, you aren’t required to keep your money in the account for any specific length of time. You could deposit $5,000 in a savings account and keep it there for 20 years, or you could take it out the next day. 

Access to funds

Savings accounts:

  • Up to six withdrawals per month

CDs:

  • Must wait for expiration of CD

When you put your money in a savings account, you can access it at any time, but there is a federal law that limits you to six withdrawals per month. If you go over that limit, it could result in any of the following consequences:

  • A declined transaction
  • A fee
  • Your savings account being converted to a checking account
  • The closure of your account

Banks usually only go to the stricter consequences, such as an account closure, if you’re a repeat offender. The reality is that savings accounts aren’t made for frequent withdrawals. If you’re routinely coming close to six per month, it’s a sign that you should be keeping more of your money in a checking account.

You should know that banks can set lower withdrawal limits on their savings accounts, such as four withdrawals per month. It’s important to be aware of what your bank’s limit is, because if you go over that, they can charge you a fee.

With a CD, you’re not allowed to access your money until the end of its term. You’d need to close the CD to get your money early, and when you do that, there is a penalty. There are no-penalty CDs that allow you to withdraw your money without losing any of the interest it has earned, but their interest rates aren’t as high as CDs that do carry penalties. If you’re only comfortable with a no-penalty CD, you should probably get a savings account instead.

Interest rates

Savings accounts:

  • Usually lower than CDs, can vary with market rates

CDs:

  • Usually higher than savings accounts, fixed for the life of the CD

An advantage CDs have over bank accounts is their interest rates. Now, this doesn’t mean that CDs always have higher interest rates. But the best CD interest rates are higher than the best savings account interest rates.

Banks typically offer higher interest rates on CDs with longer terms. So you can expect to earn more on five-year CDs than on one- or three-year CDs.

Another difference between these two products is that savings account interest rates can change with the market, whereas a CD’s interest rate is locked in when you get it. Either one can be a benefit or a drawback depending on whether interest rates rise or fall.

A CD certainly gives you more security, because you’re guaranteed a specific interest rate for the full term. If interest rates dropped, then you’d come out ahead had you opened a CD. On the other hand, if interest rates rose, then you’d be locked in to a lower rate than what was currently available.

Additional deposits

Savings accounts:

  • You can deposit money into your account at any time

CDs:

  • You can’t deposit more money after opening the CD

The same rules apply here that applied to withdrawals. You can deposit more money to your savings account any time you want. Once you’ve opened a CD and chosen how much to deposit, you can’t decide to put in more cash halfway into the term.

You could, however, open more CDs at set intervals. This is called a CD ladder, and it does have its perks. You’ll be able to deposit more money overall, since you can save more in between each CD that you open. If interest rates go up, you can take advantage when you open a new CD (although this becomes a disadvantage if interest rates fall).

Regular fees

Savings accounts:

  • May have monthly fee

CDs:

  • No fees (except early withdrawal penalty if you close the CD before end of term)

Finally we have fees, everyone’s least favorite part about banking.

Some savings accounts have a monthly fee, although there are often ways to get this fee waived, such as maintaining a minimum daily balance or linking it to a checking account with the same bank. There are also many banks available that offer true no-fee savings accounts.

The only possible fee with a CD is an early withdrawal fee. This is easily avoidable, as you just need to keep your money in the CD for the whole term.

How to choose between a savings account or a CD

Let’s wrap it up with when you should go with a savings account and when you should get a CD.

A savings account is the way to go for money you could need at any moment, with the best example being your emergency fund. It’s also a good choice when you’re working towards a savings goal and you want to deposit money towards that goal on a regular basis.

If you know you won’t need the money for a while, then you can take advantage of the interest rates that CDs offer. These are also good when you want to make sure that you don’t touch the money that you’ve saved up. By putting it in a CD, you’ll have extra motivation to keep it there, because you won’t want to lose money from an early withdrawal penalty.

When in doubt, it’s best to start with a savings account. You can still get a good interest rate, and you’ll have access to your money whenever you need it.

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