Certificates of Deposit (CDs) and savings accounts are both common ways to save and grow your money, but they have different features and can be appropriate to different financial goals. Let’s look at the differences between a traditional CD and a savings account so you can decide which is right for your financial goals.
What is a CD?
With a traditional CD, you typically deposit your money for a set period of time and receive a fixed interest rate. CD terms can range from a few months to years. The end of the CD term is called the “maturity date.”
CDs generally offer higher interest rates compared to traditional savings accounts. However, you usually won’t be able to access those funds for the term of the CD without paying penalties.
Pros and cons of CDs
A CD can provide a predictable rate of return on your investment. When you open a CD, you'll typically know exactly how much interest you'll earn upon maturity. And, because you know in advance exactly how much you’ll be earning, it can be a good option for saving towards long-term goals, like a down payment on a house.
That said, there are some things to be aware of with CDs. They can be less liquid than other types of accounts. Withdrawing money before the CD matures can result in a penalty — usually a few months’ interest. This is not true for all CDs. For example, no-penalty CDs don’t charge accountholders a penalty for withdrawing money early.
What is a savings account?
A savings account is a type of bank account designed to help individuals store and grow their money. Savings accounts typically allow you to earn a little bit of interest.
Pros and cons of savings accounts
Savings accounts have several benefits – they allow for more flexibility to access your money, making them an option for emergency funds or short-term savings goals. You can also earn some interest on your money, though typically not as much as with a CD. Other types of savings accounts – such as a high-yield savings account – can offer the ability to earn more interest.
There are a few drawbacks, too. In addition to lower interest rates, savings accounts may come with fees under certain conditions. For example, there might be a fee if you dip below a certain average monthly balance. Keep in mind that the financial institution may also limit the number of withdrawals or transfers you can make per statement cycle.
CD vs. savings account: Key similarities and differences
Here are some of the major similarities and differences between CDs and savings accounts:
- While both savings accounts and CDs usually let you earn interest on your money, CDs typically offer a higher interest rate than savings accounts
- The money in a CD is usually less accessible than the money in a savings account. You might pay a penalty for withdrawing money early from a CD.
- You can typically deposit money into a savings account whenever you like. This is typically not the case for CDs (though with an add-on CD, you can deposit additional funds during the term).
- The interest rate on a savings account can change with market rates, while the rate on a CD is usually set for the term
- Both CDs and savings accounts can be FDIC-insured up to FDIC limits if the financial institution is FDIC-insured.
When to choose a CD vs. a savings account
Whether a CD or a savings account is right for you will depend on your financial goals. CDs can be a great way to grow money for a medium-term goal, like buying a car. Putting your money in a CD, which is less accessible than a savings account, can reduce the temptation to spend the money. A savings account might be the right option if you need access to your money, such as with an emergency fund.
Remember that both CDs and savings accounts can be valuable tools in your savings strategy – so you shouldn’t feel limited to just one. You might put some money in a CD to save for a new car and some in your savings account for your next big vacation.
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
