The Difference between a Savings and a CD Account
When you’re ready to get fit, you start working out, trying to find the best equipment that gets you the most bang for your buck. What will really get you looking like J. Lo who seems to defy age? Similarly, when it’s time to get financially fit you want to find the right tools to help grow your assets and that starts with saving. There are two different tools that can help you stash your cash: savings accounts and CD accounts. Read on to learn more about these two options and decide what is best for you.
Savings accounts
A savings account is exactly what is sounds like. It’s an account where you deposit your savings. So whereas your checking account is used for your day-to-day spending, your savings account is where you want to save your money. Maybe it’s used to save for a rainy day fund, travel or a hobby you want to pursue.
Savings accounts help you earn interest on your deposits and you can typically get the best rates at an online bank like Ally. There are other banks like Capital One that allow you to nickname your savings accounts so you can know exactly what you’re saving for.
The good thing about savings accounts is that there may be no minimum deposit and you can easily access your funds if you need to. It’s also easy to automate your savings. You can set up automatic transfers from your checking to your savings and even have part of your paycheck be direct deposited into your savings accounts.
Ultimately, a savings account is a good tool to save your money and earn interest while keeping it easy to access.
CD accounts
CD accounts, aka Certificates of Deposit is like the savings account’s more sophisticated brother. The one who has more rules and more restrictions but also can help you earn more too. A CD account is similar to a savings account as you set aside money for savings. But with a CD you deposit a specific amount of money for a set period of time.
You can’t access that money until the term is up, when your CD “matures” (it’s all grown up!). At that point, you can either cash out your savings or roll it over to another term.
So unlike a savings account, your money isn’t as accessible with a CD account. The trade-off is that you get higher Annual Percentage Yields (APY). According to NerdWallet, the terms for CDs can range from three months to five years.
Savings vs. CD accounts
Savings accounts and CDs are two ways to save. Savings accounts will earn you less interest but give you more flexibility. CD accounts can earn you higher rates but your money is locked in. If you have a term for one year or more, that can be a lot.
On top of that, if you withdrawal from a CD before it matures you’ll likely be hit with a penalty. There may be a minimum deposit as well.
When deciding between a savings account and CD accounts, look at the APY you’ll get, if there are any minimum deposits, the terms of the CDs (for example 12 months), etc.
Which one is right for you?
So which one is right for you? When looking at savings vs. CD accounts, you want to consider your ultimate goals with saving and your need for flexibility.
For example, if you’re saving for an emergency fund you likely want the flexibility and access of a savings account. If you’re saving for a trip in more than a year and won’t be touching that money and want it to grow, a CD may be a better fit.
Ultimately, it comes down to flexibility and access. Yes, a savings account may earn less interest but having access to it without penalty when you need it is huge. On the other hand, earning more with a CD is great if it’s for a specific goal and you don’t need to touch it before the term is over. You also want to consider your short-term and long-term goals to help decide which savings vehicle will get you where you need to go.
Need any help deciding? Talk to a financial trainer and get started with a plan.