CD vs Savings Account: Which Is Better for You?

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Putting your money away in a savings account or a certificate of deposit, or CD, is a better strategy than hiding it under your mattress. With either of these accounts, you’ll earn a bit of interest. Your money will be safely tucked away and insured by the FDIC.

But what’s the difference between a savings account and a CD, and which is better for you? To choose what is best for you, it is important to know how they compare.

How Is a CD Different From a Savings Account?

The biggest difference between a certificate of deposit and a savings account is that CDs lock your funds into the account for a set period of time — so your funds aren’t very accessible in a CD, but they are in a savings account. However, the trade-off is that CDs often have higher interest rates, and they guarantee that rate for the entire term of the deposit.

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Read on for more details on CDs vs. savings accounts to help you decide which is best for you.

What Is a Savings Account?

A savings account is simply an account at a bank, credit union or other financial institution that earns interest. You can’t write checks against one, but some savings accounts do let you dip into your funds by using an ATM card. You can also transfer the money to your checking account.

Savings account interest rates can fluctuate, depending on what type of account you open. There are high-yield savings accounts, which offer higher interest rates. High-yield savings accounts can often be found at online banks — online banks are more likely to offer annual percentage yields (APYs) because they have lower overhead costs than brick-and-mortar banks.

Here’s a look at how rates at three online banks compare:

Bank Savings APY
Ally Bank
Barclays Bank
Discover Bank

Opening either a high-yield savings account or a traditional savings account is easy. Shop around for the best rates, be aware of any minimum deposit requirements and keep an eye on fees, as well.

What Is a CD?

A certificate of deposit is like a savings account in that you’ll earn interest on the money you put into it. Unlike a savings account, a CD requires you to keep your money in the account for a certain period of time or you could incur early withdrawal penalties. CD terms typically range from three months to five years and require you to maintain a minimum balance. The longer the term, the higher the interest rate will typically be.

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Here are some examples of APYs for 5-year CDs at online banks:

Bank 5-Year CD APY
Ally Bank
Barclays Bank
Discover Bank

Always shop around for the best rates on CDs. Unlike savings accounts, you typically can’t dip into your CD when you need quick cash without paying a penalty. That means your money is locked up for the length of the term. This could be a good thing if you’re the type of person who has trouble saving money due to impulsive purchases, but you may have financial difficulties if an unexpected expense arises.

If you miss the maturity date entirely, the bank will automatically roll the money over into another CD for the same length of time. Sometimes people buy CDs specifically to save for certain events, such as college or to buy a house. If that’s the case, you can just withdraw the money and use it for its intended purpose. Finally, if CD rates have risen and you want to take advantage, you can simply open a new CD at new interest earnings.

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CD Ladder Strategy

The guaranteed APY can be a disadvantage if interest rates go up and you’re stuck at the lower rate. Shorter terms can help with that, but they also tend to have lower APYs in general. You can use what’s called a CD ladder strategy to address both these issues.

Laddering CDs is investing in several CDs of different term lengths — 1-year, 2-year, 3-year, etc. When one CD matures, you can roll it over into another CD at the longest term for the higher interest rate, or you can withdraw the money. This way, you’ll be able to take advantage of longer-term CDs with higher rates and still have access to your cash at shorter intervals.

CD vs. Savings Account: How To Decide

CDs have slightly higher interest rates, but you’ll need to commit to staying the course throughout the length of their term. A savings account doesn’t earn as much in interest, but you’ll be able to access your cash whenever you want or need it.

If a savings account requires a minimum deposit, it is usually rather low — sometimes, you can open an account with as little as $1. CDs often require a minimum deposit of $500 or more.

You should do plenty of research before committing to any account. Whichever you choose, make sure it’s the best option for your finances.

Final Take: CD vs. Savings Account

Consider opening both accounts at the same time. Open a savings account for emergencies, and put some money away in a high-yield CD to save up for planned future expenses. The money in the CD will earn interest at a competitive rate and will be there for you when it matures. Either way, saving money for the future is always a smart investing decision.

FAQ

  • Is it better to put money in a CD or savings?
    • If you need easy access to your money, opt for a savings account. If you're able to lock your funds into the account for a set term in exchange for a guaranteed interest rate, a CD is the better option.
  • Why would you choose a CD instead of a savings account?
    • On average, a CD has slightly higher interest rates, so you earn more. However, you cannot access this money without incurring early withdrawal penalties until the account has reached maturity.
  • Is a CD safer than a savings account?
    • Both CDs and savings accounts are FDIC-insured, so neither is safer than the other.
    • A CD, though, does offer a guaranteed return after the maturity for the account has been reached. Savings accounts are less certain in terms of interest earned.

Gail Kellner contributed to the reporting for this article.

Rates are subject to change; unless otherwise noted, rates are updated periodically. All other information on accounts is accurate as of Jan. 27, 2023.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

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About the Author

Caitlyn Moorhead has written content for a variety of businesses and publications. After graduating from Central Michigan University cum laude, she moved to New York City where she wrote columns, articles and plays for several years before relocating to Austin, Texas in the fall of 2020.
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