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

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Updated on Wednesday, July 28, 2021

If you’re looking for a place to safely park your cash, a savings account or a certificate of deposit (CD) are two options that will allow you to earn interest on those funds. To decide which one is right for you, consider how often you will need access to your money. A CD may offer you a higher interest rate than certain savings accounts, but your money will be locked up for a certain period of time and won’t be accessible to you without having to pay a penalty. A savings account, on the other hand, offers more flexibility to make withdrawals but typically comes with lower interest rates. Read on to determine which type of account is best for your savings.

Certificates of deposit (CDs) vs. savings accounts

Both savings accounts and CDs are safe places to save your money if you’re banking with an institution insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA). CDs and savings accounts are broken down in detail later in the article, but here’s an overview of the basic differences between the two accounts:

Account featuresCertificate of deposit (CD)Savings account
Annual Percentage Yield (APY)Generally higher than savings accounts; a longer CD term often means greater APYGenerally lower than CDs; sometimes larger for higher balances
LiquidityCannot withdraw money early without incurring a penaltyTypically six free withdrawals per month
DepositsOne-time deposit at account openingUnlimited deposits
DurationPredetermined duration; money can be withdrawn when the term is overNo set duration
InsuranceFDIC- and NCUA-insuredFDIC- and NCUA-insured

CDs typically offer higher interest rates than savings accounts, but your money is less accessible. When opening a CD, you’ll agree to a predetermined interest rate and CD term, or length of time you need to leave your funds deposited to avoid early withdrawal penalties. Once a CD reaches its maturity date, you can withdraw the funds without penalty. These penalties are usually calculated as a percentage of the interest earned. Different financial institutions may have different rules about early withdrawals. A CD is often used as a way to safely store money long-term while accruing some interest.

A savings account is one of the simplest tools for money management. You can deposit money into a savings account whenever you want, and typically make up to six free withdrawals per month before incurring a fee from your bank. (Regulation D, which required the six-per-month limit, was lifted by the Federal Reserve in 2020 due to the coronavirus pandemic. The Fed now allows financial institutions to choose whether they enforce the limit or not.) Savings accounts typically pay interest, though rates can vary. Some banks may offer higher interest rates on a tiered basis for larger balances. A savings account is often used for an emergency fund: this way, if an unexpected cost comes up, you can easily withdraw your money to pay for it.

Of course, you can maintain more than one type of account according to your financial needs — for example you might have a savings account to stash a rainy day fund and a CD for an expected down payment on a home in a few years.

Certificates of deposit (CDs)

A certificate of deposit is a savings vehicle that works as a timed deposit, with term lengths ranging anywhere from days to years. After a customer agrees to the CD terms and makes the deposit, the bank gives them a certificate with a guaranteed amount the deposit will be worth after a certain period of time. CDs with longer terms generally come with higher interest rates than those with shorter terms. At the end of the CD term, you’re typically offered the choice to withdraw your money or roll it into another CD.

MagnifyMoney has compiled a list of the best CD interest rates, sorted by duration. Keep in mind that locking in an interest rate with a CD can be beneficial if interest rates fall during the term of your CD, but you may also be passing up the opportunity to earn more interest if rates rise during that period.

Traditional certificates of deposit are the most common, but there are a few other types of CDs. No-penalty CDs don’t charge a fee for early withdrawals, and jumbo CDs, which require a higher minimum balance, will often offer higher interest rates than traditional CDs.

How to save using a CD ladder

Some people choose to structure their deposits as a CD ladder, which involves splitting your money into a series of CDs that have different maturation terms. By staggering the times of the deposit, you can ensure that each CD matures at regular intervals, which allows you to withdraw a portion of your funds more frequently than you’d be able to with all of your money in just one CD. The CD ladder structure allows for more liquidity, but there are still limitations because each CD has a set duration.

Should I open a CD?

  • If you have a specific savings goal in mind, a CD is a great way to ensure that your savings will reach a certain monetary amount by a set date because of its fixed APY.
  • If you know that you won’t need to access your money for the length of the CD term, a CD can potentially earn you more interest than a savings account would.
  • If you want to commit fully to your savings plan, the inflexibility of a CD can be an advantage — you’re forced to keep your money in the account or risk losing some of the dividends.

Savings accounts

Savings accounts are a very popular type of deposit account that typically offer interest. Like CDs, they can be a secure way to save, as they’re insured by the FDIC or the NCUA. Savings accounts generally have a monthly limit on withdrawals. Financial institutions often tweak their interest rates based on the federal funds rate set by the Federal Reserve, so the APY on a savings account may be subject to change without notice.

MagnifyMoney has compiled a list of the best savings account interest rates that are currently available. High-yield savings accounts are often offered by online banks, which are able to pare down their overhead costs in order to provide the most competitive possible interest rates to their customers. These banks may not be able to provide the same level of customer service or access to physical branch locations relative to traditional banks, but if you’re just looking for a simple savings account to store your money, a high-yield account may be your best bet.

Before opening a savings account, be sure to check if there are specific requirements. Some financial institutions require a minimum deposit to open the account or a minimum balance requirement to earn interest or avoid fees. Different banks have different fee structures; some charge monthly maintenance fees that are often waived, and banks generally charge customers if they exceed their limit of six withdrawals per month.

Should I open a savings account?

  • If you’re looking for a safe and easy way to maintain an emergency fund to pay for unexpected expenses, a savings account is a great place to store that cash.
  • If you need to access your money in the near future — or you’d at least like the option to — a savings account allows you to withdraw funds anytime without incurring a penalty, unlike a CD.

How to open a CD or savings account

It’s often a straightforward process to open a CD or savings account. Banks generally offer customers the option of opening an account at a branch location, over the phone or online. To open an account, a financial institution will require materials such as a government-issued photo ID, basic personal information, contact details and potentially more. If the account requires a minimum deposit to open, you’ll need to provide sufficient funds to meet that requirement as well.

Choosing a bank for a CD or savings account

Once you’ve decided whether to open a CD or a savings account, you have to decide which financial institution to open the account with. Many people choose to go with a bank, which often provides the widest range of services, but a credit union could be a good option. Credit unions operate as not-for-profit entities that are owned by their account holders, in contrast to for-profit banks (which are owned by stakeholders or other private entities). Credit unions tend to offer higher interest rates and fewer fees.

Beyond the interest rate, there are other factors to take into account when choosing a bank or a credit union. Account fees are an important consideration, for example. Customers should also assess a bank’s customer service record, branch availability and whether they’d like to use a financial institution’s other services beyond opening a CD or savings account.