We’ve asked six financial experts to weigh in on different kinds of savings vehicles to find out once and for all — CD vs savings account: which should you choose?
CDs vs Savings Accounts: What’s the difference?
Before we look at why you might choose one savings vehicle over the other, let’s cover the basics of savings accounts and certificates of deposit (CDs).
A savings account is perhaps one of the most well known savings vehicles. It is a place to store your money in a bank or financial service provider and earn interest. Here are the general stats for a traditional savings account:
- Term (aka the length of time you have to keep your money in the account): Unless your bank or financial service provider says otherwise, you can leave your money with them for any length of time.
- Interest rate: Interest rates/annual percentage yield (APY) for savings accounts are generally lower than CDs (you can check out rates here), depending on the bank or financial service provider. Meaning you don’t make as much money from it.
- Minimum deposit: Again, depends on the bank or financial service provider, but minimum deposits can range anywhere from $0 to $300. You can typically contribute as much money as you like to your savings account.
- Transaction Limitations: Consumers are usually limited to six withdrawals per month.
- Fees: You don’t normally have to pay a monthly maintenance fee for your savings account, but some banks or financial service providers will make you pay a fee if you withdraw your savings too often or if you go below the minimum balance.
Certificate of Deposit
A CD is actually a type of savings vehicle (not confusing at all) but has a few key differences from a traditional savings account. We do a deep dive of the benefits of CDs here if you want to learn more, but here are the general stats for a CD:
- Term: Unlike a savings account, you leave your money with your bank or financial service provider — untouched — for an agreed-upon period. That period can range anywhere from seven days to ten years.
- Interest rate: A CD generally has higher rates or annual percentage yields (APYs) than traditional savings accounts. Usually, CDs have a fixed interest rate, meaning rates won’t change once you open your CD. You can sometimes get a higher interest rate if you agree to a longer term or if you purchase from online banks.
- Minimum deposit: Again, this depends on the bank or or financial service provider, but the minimum deposit is normally between $250 and $10,000. You can usually only make one deposit when you set up a CD.
- Early withdrawal penalty: There are no fees to store your money, but generally you’ll have to pay an early withdrawal penalty if you try to get your money out before the CDs maturity date (aka before the term is up). Some CDs (known as no-penalty CDs) allow you to withdraw money with, you guessed it, no penalty. Check out our resource on no-penalty CDs to learn more.
Note: A CD is a “savings vehicle,” not a means of building your savings by contributing to your original deposit. In summary, unlike a savings account, you can’t continue to contribute money to a CD after you’ve set it up. However, you can use a CD to grow your savings deposit thanks to interest.
CDs versus Savings Accounts: How to Choose
Now that you know the basics, let’s dig into the specifics of CDs and savings accounts. We collected insights from financial experts — Certified Public Accountants, financial coaches, Certified Financial Planners — to help you choose between a savings account and a CD.
Here’s what they had to say about the two saving options:
1. Know Your Money Goals
Your money goals are literally what you want to spend your money on. It might be a short-term goal, like new furniture or a road trip in three months. Or it might be that you want to buy a house in five years. Your money goals not only give you something to work toward but also help you decide which savings vehicle is right for you.
Stephen Newland, an accredited financial counselor, suggests considering the purpose of your savings before sticking it into a particular account:
“The first question I’d ask myself is, what do I need the money for that I’m putting in savings or a CD? Am I highly likely to need this in the next few months?”
According to Stephen, if the answer is yes, it’s probably better to keep the money somewhere where you can easily reach it—like a savings account or high-yield checking account. If the answer is no, and you’re not planning to take your money out early (risking an early withdrawal fee), you can take advantage of a CD’s higher interest rate to grow your deposit and hit your money goals.
Remember: This is a big difference between savings accounts and CDs—with savings accounts you can continuously add to the account but with a CD, you generally only get to deposit once. Keep this in mind when selecting the best option for you.
Oliver Dale, Editor in chief of MoneyCheck, has positive feelings about these CD rates:
“CDs offer a far higher interest rate than you would receive through a savings account. In most cases, CDs also provide higher returns than many other investment vehicles, such as money market accounts or funds.”
And, since CD interest rates are generally locked in (meaning they won’t go down even if interest rates drop elsewhere), you know exactly how much extra you’ll have at the end of the CD’s term, meaning you can use the money to achieve a long-term savings goal. This is another key difference between savings accounts and CDs, with a savings account your APY is generally subject to change with the market.
In other words, saving for goals that you want to reach in the near future might be better suited to a savings account because, well, you can withdraw the money easily and you can also continually contribute money to the original balance. Saving for goals that you want to achieve in a year or more might work best in a CD since you typically earn more interest on the money you deposited when you set up the CD. And you’re also less likely to spend that money on other things since it’s normally harder to access.
2. Look at Your Current Financial Situation
So you know what you want to do with your money. Now it’s time to review how your current finances are shaping up to see what savings option makes the most sense right now.
Let’s say you want to save for a European vacation in one year. But you also don’t have enough money in the bank to cover a $1,000 emergency right now. Instead of throwing all of your savings into a CD for that vacation right away, it might make more sense to put that money into a savings account to build an emergency fund.
Remember: The money stored in a CD is harder to access while the money you store in your savings account is generally an easy transfer away.
Ken Boyd, CPA, says:
“I recommend first building a $1,000 savings account balance to handle emergencies, such as a car repair . . . don’t invest in a CD, unless you have other money available to cover an emergency.”
Meghan Rabuse, former analyst for Morgan Stanley, echoes these thoughts about CDs and emergency funds:
“[With CDs], the longer you are willing to wait, the higher the interest rate you can earn. This can definitely be a good option for short-term investing, or if you are saving for a specific purpose in the future, but it is not a good option for emergency funds . . . because you never know when an emergency will hit.”
Look at your budget, and get your savings priorities in order. Once you’re set to cover emergencies, you can then look at putting your savings into other options.
3. Consider the Trade-Offs
Keeping your financial situation and the purpose of your savings in mind, the question is now, which savings option are you most comfortable with? Let’s look at the trade-offs for each.
One thing’s for sure: both a savings account and CD offer safe places to store your savings as, normally, they’re insured up to the legal limit by the FDIC, which means the United States government protects your funds if the bank suddenly fails.
But then there’s the matter of “the market.” Sure, savings accounts let you easily withdraw your money, but their interest rates can go up or down, depending on how confident the Federal Reserve is about the economy. A CD’s interest rate generally remains the same for the length of the term, no matter what. That might work against you if interest rates go up but will work in your favor if interest rates go down:
“If you can afford to part ways with a portion of your savings for at least a year, a CD could be a good way to earn more on your money in the long term without taking on any risk.” Tanza Loudenback, Senior Business Reporter, Business Insider
Plus, there are ways to lower your risk even more with CDs. Take CD laddering. We give an in-depth explanation here, but CD laddering is when you set up a series of CDs that mature at different times. You get good interest rates while still having access to your money at certain points during the year(s).
“With CD laddering, you can open long-term CDs, still access funds frequently, and [open new CDs] as interest rates climb.” Jeff Rose, CFP, Good Financial Cents
If you want to play it safe with your money while still earning high interest, CDs are a great option. But if you’re willing to take a chance that interest rates are going to increase, a savings account can work for you.
Savings account vs. CD? Consider the purpose of your savings.
Storing your current savings in the right saving vehicle is a great way to get ahead and set yourself up for financial success. Trust the experts. Take it step by step. Ask yourself what you want to do with this money before choosing between a savings account and a CD.
Or have your cake and eat it, too, because it doesn’t have to be a question of CDs versus a savings account, you don’t have to choose one savings vehicle over the other. You can go with both.
For example, Simple offers a high-yield checking account. While not an actual savings account, it can be used to stash your savings and earn interest (check the full terms and conditions for details). Simple also provides a 12-month no penalty CD with competitive interest rates. You can store your emergency fund in your Protected Goals Account, where it’s always within reach, while the money stored in a CD for your long-term goals is earning (consistent and predictable) interest and away from temptation!
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