CD vs. Savings account: What's the difference?

People save money for a variety of reasons. Given the diversity of savings goals out there, it makes sense that financial institutions offer numerous ways to save. Most people know about savings accounts, but have you heard of certificate of deposit (CD) accounts? Let's explore the difference between CD vs. savings accounts further, as both offer unique ways to save.

What is a CD account?

A certificate of deposit (CD) account is an alternative to a traditional savings account. A CD account typically requires a higher balance than savings accounts, and your funds will usually remain on deposit for a fixed period of time (the “term” of the account). You can start earning interest after you make a one-time opening deposit and can choose your CD account's term length based on your bank's available CD account term options.

CD accounts may offer better interest rates than savings accounts. Longer terms will usually also have more favorable rates. Note that your rates will remain fixed if you chose a fixed CD rate over an adjustable CD rate.

What is a savings account?

A savings account is an account where you can set money aside for your savings goals. Savings accounts are usually meant for putting money aside as opposed to daily spending (which is what checking accounts are for). Withdrawals from savings accounts are allowed, but may have some limits. Many savings accounts may also bear interest, though rates are usually variable.

What is the difference between a CD and savings account?

One main factor that separates a CD account from a savings account is access to your funds. You can typically access your funds in a savings account more easily than a CD account; however, some banks may charge a fee if too many withdrawals are taken from the account. You will almost always incur a penalty if you withdraw funds from a CD account prior to the CD's maturity date. Check with your bank for specifics on their policies.

Deciding between CD or savings account

Here’s a quick comparison that may help when deciding between a CD or savings account:

When to consider a savings account:

• You need the money to be accessible, like an emergency fund.
• You’re saving for a smaller or relatively short-term goal.
• You’re primarily putting money aside instead of trying to grow it.
• You don’t mind variable interest rates.
• You have a small opening balance.

When to consider a CD account:

• You can afford to let the money sit for a while.
• You’re saving for a bigger or longer-term goal, like a down payment on a home.
• You’re trying to grow your money a little.
• You’d prefer to lock in your interest rate with a fixed rate.
• You’ve got a larger opening balance.
  

Of course, it doesn’t need to be a choice between one or the other. For instance, you might use a savings account to build up a rainy-day fund, and a CD account to save for college.

In summary

Every situation is different, which is why there’s more than one way to save. When it comes to choosing between a CD vs. savings account, the “right” choice is the one that meets your needs.