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
- 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.
Minimum Balance Amount
CD Bank — 12-month CD
Banesco USA — 12-month CD
Quontic Bank — 12-month CD
Limelight Bank — 12-month CD
Live Oak Bank — 12-month CD
*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
- 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.
Monthly maintenance fee
Minimum deposit required
USALLIANCE Financial — High Dividend Savings
Comenity Direct — High-Yield Savings Account
Banesco USA — BanesGrow Savings Account
Rising Bank — High Yield Savings Account
WebBank — Savings
*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.