If you want to save for the future, just pocketing your money won’t always work. Instead, you’ll have to find a safe place to put it where it can earn interest over time. For most people, that means placing their cash in either a certificate of deposit or a savings account. What’s the difference between a CD vs. savings account? Both will earn you money. Both can help you reach your goals. The differences lie in the details.
What Is a Savings Account?
Savings accounts are one of the most common savings tools consumers use. They are accounts where you can set aside money to meet specific savings goals, such as for vacations or an emergency fund. Since they earn interest, they provide an easy way to earn a little cash on the money you set aside. You can usually open a savings account with a very small amount of money, often as little as $5.
You’ll find most financial institutions work savings accounts and checking accounts together. Your money goes into checking to manage daily living expenses. When you have extra, you move it into savings accounts for a higher interest rate. It’s a simple way to handle all life throws at you during the year.
Some savings accounts come with withdrawal limits, meaning you can only withdraw funds a few times a month. Different savings accounts offer variable interest rates, allowing you to earn based on what you save. It’s essential to research and compare products before deciding what’s suitable for you.
What Is a Certificate of Deposit?
Certificates of deposit, also known as share certificates or CDs, are another savings vehicle offered by financial institutions. A higher deposit is typically required to open share certificate accounts, but in return, they usually have a higher interest rate than traditional savings accounts, allowing the account holder a greater rate of return.
Share certificates are typically termed between three months and five years. Once you open your account, you must leave your money in the account for the designated term. If you take the money out early, you’ll generally pay a penalty on the amount you withdraw. It can quickly overtake any interest you earn, so it’s a good idea only to use money set aside from other goals and needs.
How Are CDs and Savings Accounts Similar?
The two accounts have a similar goal of allowing you to earn interest on your money. They also share a few other important characteristics, such as:
- FDIC or NCUA insurance: Most banks and credit unions that offer share certificates and savings accounts are FDIC or NCUA insured. This means deposits are insured for $250,000 per depositor, per account, per ownership category.
- Low-risk investments: Both accounts can be a great addition to your investment portfolio. While you won’t generate large returns, each offers a great way to earn extra cash on the money you’ve set aside for specific savings goals.
- Some liquidity: While you might have withdrawal limits or pay a penalty if taken early, you can still quickly access your cash in an emergency. It’s much easier than less liquid investments such as stocks or real estate.
Difference Between Certificates of Deposit and Savings Accounts
Both investments work to help you save. Both share certificates and savings accounts will allow you to earn interest on your money. Yet there are distinct differences to be aware of.
The biggest difference between a CD vs. Savings Account is accessibility to your funds. While savings accounts may limit the number of withdrawals you can make in a month, you’ll still have access to as much or as little of the funds you need. They may charge a fee if too many withdrawals are taken, but by staying within the guidelines, you will always have access to your funds as needed.
The other main difference is their interest rates. Savings account interest rates are flexible and can change based on current Federal policies and other market conditions. What you’re receiving in interest today might be available tomorrow. If you want guaranteed rates, a certificate of deposit provides specific rates for a set amount of time.
Determining Which Option Is Right for You
Here’s a quick guide to help you determine which is right for you:
Choose a savings account if:
- You want accessibility to your funds
- You’re saving for a short-term goal
- You don’t mind a variable interest rate
- You’re starting with a small amount of money
Choose a certificate of deposit account if:
- You’re looking for more earnings
- You’re saving for a bigger, longer-term goal
- You’re creating a portfolio to earn money and watch it grow
- You prefer a fixed interest rate
- You have more money to invest
Picking Your Product
Are you ready to invest your money in a CD vs. Savings Account, or both? Different financial institutions can offer additional features that make products even more attractive.
In northeast Wisconsin, for example, Capital Credit Union offers a Member’s Choice Certificate. This provides what consumers love about share certificates and savings accounts into one flexible option. You’ll earn the higher dividends you expect from a share certificate and also have the flexibility of taking a one-time penalty-free withdrawal. It’s a win/win for your savings goals. It’s your money, your life, your goals. You have options when it comes to choosing a product that works well for your savings. Your best choice is to consider your investment time horizon and stay flexible with your savings goals. Both certificates of deposit and savings accounts are considered short-term, low-risk, low-yield financial options that will continue to work well for your short-term financial goals.