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CDs vs. Savings Accounts: Which Is Right for You?

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Choosing between CDs vs. savings accounts sounds simple -- just decide how much access you want to your cash. While CDs typically offer a higher interest rate, you won't be able to touch your money for a while. If you want flexibility, a savings account makes sense, but you won't earn as much in interest. Of course, given the many types of accounts, comparing CDs vs. savings accounts isn't always simple.

To help you determine which is the better choice -- aka CDs vs. savings accounts -- we've broken down how these types of accounts work, including their benefits and potential downsides.

How do CDs work?

A CD, or certificate of deposit, is a "fixed" or "term" type of account. You don't touch your funds for a specified period, and receive a higher interest rate in return. If you're comparing CDs vs. savings accounts, you may be impressed at the high interest rates offered by CDs.

CD terms can be anywhere from a few weeks to a few years. If you make an early withdrawal, you'll usually pay a penalty. If you're weighing the pros and cons of CDs vs. savings accounts, this is one important factor to pay attention to.

When looking at CDs vs. savings accounts, CDs also tend to require a higher initial deposit. No additional deposits are allowed afterwards.

A CD opened through a bank or credit union will be FDIC- or NCUA-insured. That means a total of $250,000 across all accounts will be insured per depositor, per institution. Savings accounts are also insured, so if you're weighing the risks of CDs vs. savings accounts, you won't see too many differences here.

How do savings accounts work?

A savings account is a type of deposit account offered at banks and credit unions. You can deposit anytime you want, and withdraw or transfer money from your account up to six times each month (per Regulation D). In-person and ATM withdrawals don't count towards that limit, though. In comparing CDs vs. savings accounts, this is a major advantage, as CDs generally do not allow any penalty-free withdrawals.

You can transfer your funds from your savings account to a checking account in order to use your money via checks and debit cards. When comparing CDs vs. savings accounts, it's important to remember that neither offers convenient withdrawals (although savings accounts tend to be more convenient than CDs).

The best savings account rates tend to be offered by online-only banks. However, if you're looking at CDs vs. savings accounts, CDs will generally earn more interest.

Savings accounts are either FDIC- or NCUA-insured, again up to $250,000 per depositor, per institution, in the unlikely event of a bank failure.

CDs vs. savings accounts

CDs vs. savings accounts both offer you the opportunity to earn interest on your money. However, savings accounts tend to have lower rates than CDs. Both account types also have limitations on how you withdraw money, but savings accounts tend to allow more access to your funds.

When looking at CDs vs. savings accounts, remember both accounts are set up to encourage saving -- not spending. Most banks and credit unions won't offer bells and whistles such as a debit card or check-writing privileges for these accounts. In some cases, you may be able to get an ATM card for a savings account, though it's uncommon. With a CD, you'll most likely be able to withdraw funds via a bank transfer, or your financial institution will mail you a check -- but you'll pay a penalty.

That's where the similarities end when comparing CDs vs. savings accounts. When you open a savings account, the initial minimum deposit amount tends to be low. In some cases, there is no minimum amount. CDs typically require a higher initial deposit. You can usually only make one deposit into a CD, whereas with savings accounts, you can make unlimited deposits.

When looking at CDs vs. savings accounts, you'll also notice some differences in fees. CDs have early-withdrawal penalties but no monthly fees. Fees vary for savings accounts. If there is a monthly fee, it's often waived if you meet the minimum balance requirements.

Feature Savings Account CD
High initial deposit amount No Yes
Withdraw money at any time Yes No
ATM access No No
Check-writing privileges No No
Monthly fees Varies No
High interest rates Yes Yes
Early withdrawal fees No Yes

How to open a savings account or CD

You can open a savings or CD account just as easily as other types of bank accounts. In the debate between CDs vs. savings accounts, these two options are fairly equal in ease of opening an account.

First, head to the financial institution's website and fill out an application form. You can also go to your local branch to speak to a representative. You'll be asked to provide some personal details. These can include your name, address, birth date, phone number, and Social Security number. If you're comparing applications for CDs vs. savings accounts, you'll find both types ask for simple personal details to open an account.

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Afterwards, you'll make an initial deposit. Different financial institutions will offer various ways to do so, like mailing in a check or initiating a bank transfer. If there is a minimum initial deposit, you'll have to meet it. When debating between CDs vs. savings accounts, take note of minimum deposit requirements.

Finally, don't forget to familiarize yourself with the rules, regulations, and policies around your new account. For a savings account, this might include how often you can make withdrawals or transfers, how much interest your new account earns, and whether or not you need to keep a minimum amount in the account to avoid maintenance fees. If you've opened a CD account, check to see if your bank offers penalty-free withdrawals before the maturity date and how early withdrawal penalties are calculated.

Before opening either account type, shop around to find an account that suits your needs best. Be sure to check out our choices for best savings accounts, and have a look at the best CD rates.

RELATED: What is CD Laddering? See if this is the right strategy for your portfolio.

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