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CD vs. Savings Accounts: Which Is Better for Your Savings?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Making the decision to start saving a portion of your income isn’t an easy one, as evidenced by the 29% of American households that have less than $1,000 in savings. But once you’ve started down the path to becoming a regular saver, you’re likely to discover that it isn’t as simple as stuffing money under a mattress.

Banks, credit unions and other financial institutions offer a cornucopia of different savings products, clouding your commitment with a morass of marketing buzzwords. Fortunately, you’ve come to the right place for clarity on two of the most popular places to park and save your money: certificates of deposit (CDs) and personal savings accounts.

Which one is best for you and your money all depends on why you’re saving. If you plan on saving for a specific goal and know you won’t need to spend it until a fixed date in the future, you’ll want to look at a CD. If your reason for saving is so you don’t have to start burning the furniture for warmth the next time the furnace breaks, then you should put your money in a savings account.

“You give up some yield by using a savings account instead of a CD,” said Ken Tumin, founder of DepositAccounts.com, a website which, like MagnifyMoney, is owned by LendingTree. “However, you get quicker and easier access with a savings account.”

CDs vs. savings accounts: The case for CDs

Key takeaways:

  • Higher interest rates than savings accounts
  • A fixed interest rate that the bank can’t change for the duration of the CD’s term
  • One of the safest places to deposit your money, but you can’t access it without penalties

CDs are accounts where a bank, credit union or online financial institution agrees to hold your money for a set amount of time and pay you a fixed rate of interest on the deposit. For CDs, the interest rate, which is expressed as the annual percentage yield (APY), tends to be higher than that you generally see on savings accounts.

Institution

Minimum Balance Amount

APY

CD Bank — 12-month CD

$10,000

2.70%

Banesco USA — 12-month CD

$1,500

2.40%

Quontic Bank — 12-month CD

$1,000

2.40%

Limelight Bank — 12-month CD

$1,000

2.35%

Live Oak Bank — 12-month CD

$2,500

2.40%

*CD accounts were selected from the database of DepositAccounts.com (which like MagnifyMoney is owned by LendingTree) based on the following criteria: account is available nationwide; bank’s health rating is at least B+; depositor has a minimum of $10,000.

For those savers who only care about earning the highest interest rate possible, CDs may sound like the way to go. However, these accounts come with some important restrictions. With the exception of a few select offerings, once you deposit your money in a CD, you can’t withdraw it early without facing stiff penalties. Usually banks describe this penalty in terms of days of interest earned by your deposit — for example, the average penalty for early withdrawal on a 1-year CD is 120 days worth of interest, which would be deducted from the money in the account, plus any interest it has earned before the withdrawal.

Similarly, you usually can’t deposit new funds into an existing CD before the term of that CD is up. An easy way to think of a CD is an agreement between you and the bank to freeze your deposit in time where it’s locked into earning a fixed amount of interest.

Banks like this because in theory, it guarantees your money will stay with the bank for at least the term of that particular CD. Depositors get to reap the benefits of putting their money in a safe account where it earns money at an interest rate they can count on — the bank may slash the interest rate earned by CDs of that term the day after the deposit, but the customer is locked into the original rate.

Using a CD ladder to maximize earnings

One common method CD depositors use to avoid tying their money up in accounts earning a fixed interest rate while rates in general are rising is the CD ladder. The basic idea is that you place your money in a short-term CD, for example, one that matures at three months. Once the term for that CD is over, you immediately place it in a CD with a longer term, theoretically taking advantage of the rates that are higher than those offered three months ago.

Using a CD ladder means your money will be constantly earning the highest rates available while also remaining safe in a CD, but it requires you to keep on top of when your CDs mature. Many CD accounts come with terms that automatically reinvest your money in the same CD if you don’t do anything with your funds, which would defeat the purpose of the CD ladder.

You also have to feel confident that banks will offer higher rates for CDs, which has been true in recent years but won’t necessarily last forever. In an environment with falling rates, you would want to lock your money in a CD with the longest possible term in order to guarantee it earns the highest interest it can.

CDs vs. savings accounts: The case for savings accounts

Key takeaways:

  • More liquid than CDs, allowing you to access your money up to 6 times a month
  • Interest rates tend to be lower than CDs, meaning you earn less money
  • Unless specified otherwise, the bank can change the interest rate at any time

When you think about saving, one of the first products you consider is a savings account (it’s in the name, after all). Savings accounts provide a safe, reliable place to deposit your funds which allow you to earn interest while still having access to the money. While savings accounts can act as a general, all-purpose savings vehicle, they’re best utilized as a place to store your rainy day or emergency funds for those times you need cash in a hurry.

*Savings account

Monthly maintenance fee

Minimum deposit required

APY

USALLIANCE Financial — High Dividend Savings

$0

$500

2.10%

Comenity Direct — High-Yield Savings Account

$0

$100

2.25%

Banesco USA — BanesGrow Savings Account

$5

$100

2.22%

Rising Bank — High Yield Savings Account

$0

$1,000

2.20%

WebBank — Savings

$0

$1,000

2.20%

*Savings accounts were selected from the database of DepositAccounts.com (which like MagnifyMoney is owned by LendingTree) based on the following criteria: account is available nationwide; bank’s health rating is at least B+; depositor has a minimum of $10,000.

While the exact details will vary from account to account, most banks will allow you to make a maximum of six withdrawals/transfers each month free of charge (the maximum federal regulations allow under Regulation D). If you go over your withdrawal limit for the month, the bank may charge you a fee for that transaction. The fee’s amount will depend on the bank and the individual savings account — Bank of America levies a $10 fee per over-the-limit transaction on one of its savings accounts, while Chase charges $5 for one of its personal savings accounts, to give two examples.

Should you use a hybrid account?

These penalties may not seem huge, but they should give you the hint that savings accounts aren’t meant to serve as your main transactional account — that’s what checking accounts are for.

That said, the line between the two have blurred in recent years thanks to financial tech companies offering hybrid accounts that give you unlimited access to your funds while earning a high interest rate comparable with most savings accounts. But with hybrid accounts, also known as cash management accounts, you have to be comfortable with depositing your savings with an online-only institution and understand the nitty-gritty details of where these companies place your money, so you make sure your funds are both earning the promised interest rate and that the money is safe.

CDs vs. savings accounts: Where is my money safer?

Whether you choose a savings account or a CD, the money you deposit should fall under the protection of insurance provided by the Federal Deposit Insurance Corporation (better known as the FDIC). This independent government agency guarantees that in the event the bank fails or is swallowed by a sinkhole or suffers some other catastrophe that wipes out your account, the government will pay you back both the principal and the interest up to $250,000 (in a single account).

Accounts that are FDIC-insured will state so in the fine print of the account’s terms, so take the time to look over all the relevant documents before handing over your funds to an institution. Almost every major bank will have their basic accounts (checking, savings, CDs, etc.) FDIC-insured but fintech startups may not; make sure you do your homework before opening an account with a newcomer.

The bottom line on CDs vs. savings accounts

The choice on whether to deposit your savings in a CD or a savings account shouldn’t be a difficult one, considering they both serve a fairly distinct role in personal banking. People who don’t need easy access to their savings and want it to earn the highest interest rates should look into CDs. Those wanting a place to build their emergency savings that they can tap for unforeseen expenses should start shopping for savings accounts. In all likelihood, this won’t be an either/or choice and you’ll use both products.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James Ellis
James Ellis |

James Ellis is a writer at MagnifyMoney. You can email James here

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Banking

Understanding the Three Types of Annuities

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Understanding how annuities work is an important first step in determining whether they fit into your retirement plans. Annuities can be customized in many ways, although they fall into three broad categories: fixed, indexed and variable.

An annuity is a contract between you and an insurance company. In exchange for giving the company money today, you receive a lump-sum payment or series of payouts in the future. For example, you could purchase an annuity with a single payment when you retire and then receive monthly payouts for the rest of your life.

Annuities offer long-term, tax-deferred savings, making them a potentially helpful tool for retirement. But because there’s such a wide-range customization available, it can be confusing to understand all your options. Our guide covers the basics on the different types of annuities: fixed, indexed and variable.

What is a fixed annuity?

A fixed annuity is one of the simplest types of annuities — it’s somewhat similar to a certificate of deposit (CD) account. You fund a fixed annuity with a single payment or a series of payments. The insurance company guarantees this principal amount, a minimum interest rate and a number of payments in the future.

The interest rate applies to your principal balance, and your account grows tax-deferred during the accumulation phase. At the end of the accumulation phase, your payout period begins. You’ll then receive a single lump-sum payout or periodic payouts, such as monthly or annually.

“When you first buy a contract for a fixed annuity, the payout amount will be specified,” according to Ken Tumin, founder of LendingTree-owed company DepositAccounts.com, so you’ll know how much income to expect later. Also, depending on your contract, the periodic payouts could be guaranteed for a certain number of years, until you die or until you and a beneficiary (such as a spouse) die.

Fixed annuity pros and cons

Fixed annuity pros

  • This type of annuity is relatively easy to understand.
  • You’ll receive a guaranteed interest rate and payouts.
  • You’ll know the payout amount and payout period when you first buy the contract.
  • There’s little risk of losing your savings.

Fixed annuity cons

  • The interest rate may be lower than what you could receive from other savings or investment products.
  • The interest rate could be lower than inflation in the future.
  • Fees may eat into your savings and decreases your payout amount.
  • You might not be able to take money out of the annuity without paying additional taxes and fees.

Who should invest in fixed annuities?

A fixed annuity may be the most attractive type of annuity if you’re looking for stability and guarantees. However, think carefully about when and why you’re buying the contract, as the interest rate you lock-in during the purchase will influence your payouts.

“If the interest rates start to bottom, it might not be the best time to get a fixed annuity,” said Tumin. “If you think rates are going up, wait for a few years until there’s a better interest rate environment.”

What is a variable annuity?

A variable annuity may feel more like a 401(k) or individual retirement account (IRA) than a certificate of deposit. When you buy a variable annuity, you can choose to invest your money in different financial products, such as mutual funds.

Your earnings during the accumulation phase depend on how well your investments do, which will impact your future payouts. The insurance company may offer optional riders that limit how low your account’s value can drop and guarantee you a minimum payout.

You may also be able to choose to receive the payout as a lump sum, over a fixed number of payouts or until you die. If you choose periodic payouts, the payout amount could either be pre-set or it may vary with your investment returns.

Variable annuity pros and cons

Variable annuity pros

  • You could earn higher returns and have larger payouts than you would with a fixed annuity.
  • Earnings are tax-deferred.
  • The SEC generally regulates variable annuities.

Variable annuity cons

  • You may have to pay higher fees than you would with other tax-deferred accounts.
  • Your payouts count as ordinary income rather than capital gains and may be taxed at a higher rate.
  • You could lose the money you put into the annuity.

Who should invest in variable annuities?

A variable annuity can offer tax-deferred investment growth and an additional source of income during retirement. “But a lot of the best variable annuities are basically a wrapper around investment options like mutual funds,” says Tumin. The wrapper analogy can apply to other tax-deferred accounts, such as 401(k)s and IRAs, although those may offer more investment options and fewer fees.

“For those who’ve maxed out their 401(k)s and IRAs, a variable annuity can be a reasonable option,” says Tumin. Until that point, you may want to focus on investing in other, lower-cost accounts instead.

What is an indexed annuity?

Indexed annuities often offer a minimum interest rate on your money, but are also tied to an investment index, such as the S&P 500. Depending on how the index performs, you may receive more interest earnings than the minimum rate. However, there are also often caps on how much you earn.

For example, if the S&P increases by 8%, you might only receive 3% of the gains — your cap — and the insurance company keeps the remainder. On the other hand, if the S&P decreases in value in a year, you might still receive a minimum interest rate gain rather than losing money.

The specifics of your annuity can also impact your earnings because the contract will dictate the cap, how much of the index’s gains your receive, the fees you’ll pay and how often the insurer reviews the index to calculate gains.

Indexed annuity pros and cons

Indexed annuity pros

  • Offers a mix of guaranteed and investment-based tax-deferred earnings.
  • Limits the potential for losses compared to variable annuities and other investments.

Indexed annuity cons

  • Although your money gets invested, the SEC and FINRA might not regulate indexed annuities.
  • Your gains are limited by the insurance company’s fees and caps.
  • Can be particularly hard to understand and compare to other savings and investment options.
  • Although there could be minimums, you might lose money on your investment.

Who should invest in indexed annuities?

Index annuities can seem like the best of both worlds — protection against investment losses with the potential to earn more than you would with a fixed annuity. But it’s not all good news, as the fees and caps can eat into your potential investment returns, particularly during high-growth periods.

“For those that are very conservative, the indexed annuity could give you a better return than a fixed annuity,” says Tumin. However, as with variable annuities, he suggested looking into other tax-deferred investment accounts, such as 401(ks) and IRAs, before an indexed annuity.

Deferred annuity vs. immediate annuity: What’s the difference?

You can purchase these three types of annuities as either deferred or immediate annuities.

With a deferred annuity, your contract begins with an accumulation phase. During this phase, the interest or investment earnings get added to your account balance, and you may be able to make additional contributions to increase your account’s value. At the end of the accumulation phase, you’ll start to receive payouts (either in a lump sum or periodically) based on the account balance and the terms of your contract.

Immediate annuities start to pay immediately based on your payment schedule. So, if you receive payments monthly, your first payment will start a month later. But if you receive annual payments, you’ll wait a year for your first payment.

Deferred annuities can be a better option if you’re planning ahead for retirement, or are in retirement but have other sources of income. An immediate annuity may be a better option if you’re in retirement and want to lock-in an income stream.

Conclusion

There are different types of annuities, payout structures and a wide range of riders that can make comparison shopping extremely difficult. Add on the fees, brokers’ commission-based sales arrangement and the possibility of losing your “guaranteed” income stream if the insurance company goes under and annuities look much less appealing.

Still, that’s not to say annuities are all bad. An annuity can offer a steady income stream during retirement, with an option to continue the income stream as long as you’re alive (or even beyond).

However, if you’re considering purchasing one, continue doing your due diligence and learning about the differences between annuity providers and contracts.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Louis DeNicola
Louis DeNicola |

Louis DeNicola is a writer at MagnifyMoney. You can email Louis at [email protected]

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How to Handle Financial Infidelity in Your Relationship

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

For relationship partners, dishonesty about spending and debt is known as financial infidelity. While partners may be uncomfortable talking about money, keeping secrets can be far more damaging to the relationship. This can lead to devastating scenarios and even bankruptcy, as well as relationship conflicts as severe as breakups and divorce.

A MagnifyMoney study found that 21% of divorced U.S. adults report that money issues ended their marriages, and overspending was the top issue among respondents. This type of infidelity adds another layer of damage because it constitutes a betrayal of trust.

“Financial infidelity does not give us trust and safety with our partner,” said Dr. Bonnie Eaker Weil, Ph.D., psychotherapist and author of “Financial Infidelity: 7 Steps to Conquering the #1 Relationship Wrecker.” “There’s no such thing as an okay financial fib. Any time you do a financial fib, that is a form of cheating.”

That being said, there are varying degrees of financial infidelity, and the intent is not always malicious. Here’s how to handle it in your own relationship.

Financial infidelity: How people lie about money

There are a number of ways that people can be dishonest about money with their partner. Here are some types of financial infidelity to watch out for.

Hiding large purchases

This occurs when one partner buys something out of the ordinary that is more expensive and exceeds any personal spending limits the couple has agreed upon. These purchases are usually eventually uncovered by the other partner, said Jennifer Dunkle, a financial therapist and licensed professional counselor.

Spending money on the kids

A 2018 study about financial infidelity published in the Journal of Financial Therapy found that one of the most common types of dishonest spending is money spent on the couple’s children without agreement or knowledge from the other parent, said Dr. Michelle Jeanfreau, Ph.D., associate professor, licensed marriage and family therapist and the author of the study. While this might seem relatively benign or well-intentioned, it’s still a form of dishonesty, and it warrants a closer look into your finances.

“If you aren’t talking about spending, then maybe that’s a sign that you need to be talking about spending,” said Jeanfreau.

Hiding accounts or restricting access to accounts

It’s okay to keep separate accounts from your partner as long as you are in agreement about spending limits, according to Justus Morgan, certified financial planner and vice president of Financial Service Group.

But if your partner has an account that you don’t know about or refuses to give you the password to oversee an account, that’s a form of financial infidelity. You and your partner are a team, so even if one of you is more comfortable managing your finances, you should both have access to all of your financial information.

Lying about prices or sales

Maybe your partner comes home with a new purchase, and instead of hiding it from you altogether, they lie about the price they paid. Or, perhaps they say they bought it on sale when they actually paid full price.

These are both common lies that emerged during the previously mentioned 2018 study. While it may not seem as malicious as hiding a purchase, lying about price still creates dishonesty in a relationship.

Why people lie about money

In the 2018 study, some participants identified acts of financial infidelity they’d committed but didn’t admit to having been financially unfaithful. Jeanfreau said that could be because they don’t realize that their small secret or lie is actually a form of financial infidelity that can be damaging to their relationship. Another possibility, she said, is that they don’t think there’s anything wrong with this type of infidelity.

In a new study authored by Jeanfreau that is under review, researchers identified two common reasons why people commit financial infidelity. One motive for lying may be avoiding a money argument, while another reason is that people want to spend on themselves. Both motivations can indicate underlying problems with a relationship, Jeanfreau said. She also noted that some people may lie to minimize their own insecurities about spending or budgeting if they feel they don’t know how to self-spend within reason.

How to uncover financial infidelity in your relationship

So, how do you find out if your partner is keeping secrets from you? Morgan suggests looking at tax returns and credit reports together annually. It’s a healthy habit for any couple, and it should reveal missing income that was spent on a hidden purchase, as well as any credit card accounts opened without one partner’s knowledge.

If you’re concerned more immediately, you may want to ask your partner to review bank statements, credit card statements or other financial statements together. If your spouse isn’t willing to provide these statements, that should raise a red flag, said Morgan.

What causes financial infidelity?

The outcomes of this type of infidelity can range from running up a credit card to bankruptcy to even divorce. So, you’ll want to know what aspects of a relationship can make financial infidelity more likely.

Eaker Weil said opposites attract to begin with, and a saver often attracts a spender and vice-versa; this can create a dynamic ripe for conflict, so understanding your differences is key. She also said that financial infidelity often arises from a lack of empathy or affection for one another: “We use money to hide when we can’t find our partner’s heart very often.”

Both Dunkle and Morgan pointed to a power imbalance as a factor that can increase the likelihood of dishonesty. When one of the spouses is more controlling about money decisions — especially if the spouse earns more and has the attitude that it’s their money — that can create an unhealthy dynamic, Morgan said.

Preventing financial infidelity

Morgan said one of the keys to establishing a healthy relationship around money is to recognize that everyone has different experiences when it comes to money, and that family upbringing often teaches us how to deal with money when we lack more formal instruction.

Eaker Weil even recommends that couples create a family tree with help from their parents and grandparents and share their findings with their partner. This should help to answer questions: how was money handled in each person’s background? Was there fear or deprivation around money? Did people put their family needs before their own? These questions can help predict people’s attitudes about money, an important topic of discussion among couples.

“If you’re able to really understand your own values and beliefs around money, then you’re going to be able to talk to your partner about goals and expectations for your finances,” said Jeanfreau.

She added that financial education should be a part of counseling for newer couples planning to join their finances. If couples learn early on how to communicate with transparency, find a system that works for them, develop a budget and plan and review their finances regularly, it can help prevent financial infidelity behaviors from the start.

Recovering from financial infidelity

This type of infidelity doesn’t have to be the end. But it should trigger a serious discussion, a review of your financial situation and possibly even help from professionals.

Eaker Weil recommends a weekly money talk for couples who have experienced financial infidelity. She said it’s important to approach these conversations with curiosity instead of being reactive, hurt or angry about your partner’s financial infidelity.

But sometimes, the way we talk about it can actually make relationship problems worse. Dunkle said there are four destructive patterns in a relationship that need to be corrected when they occur: criticism, defensiveness, contempt and stonewalling.

Replacing those patterns by talking about your own feelings, describing the situation neutrally and describing what you want from your partner positively, rather than negatively, can help couples to move on from a financial infidelity incident. Dunkle also stressed the importance of attending couples therapy, since recovering from financial infidelity can be difficult to manage on your own.

Jeanfreau said the SAFE model is another way for couples to recover from this type of infidelity. It’s a four-step process that involves the following:

  1. Speaking the truth, or coming clean about financial infidelity
  2. Agreeing to a plan, which involves setting up a budget
  3. Following that agreement and regularly reviewing it
  4. Having an emergency plan, which usually includes seeking the help of therapists or financial advisors

Don’t assume the worst of your partner. Find out what their intention was, and try to have empathy for their situation. And remember that it’s okay to ask for help. It happens to couples everywhere, and love for each other alone can’t prevent or repair it. It may take patience and a lot of work to get back on track, but financial infidelity doesn’t need to destroy your partnership.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Lindsay Frankel |

Lindsay Frankel is a writer at MagnifyMoney. You can email Lindsay here