CD vs. Savings Account: Which Is Right for Your Future?
Are you among the 26 or 32 percent of Americans who, respectively, have less than $1,000 in savings or none at all? It’s never too late to start or grow your savings, but it’s important to do so in a way that will reap you the most financial rewards. Rather than hiding cash under your mattress or leaving it in your checking account and trying really really hard to not touch it, it’s smartest to put it in a designated savings account or certificate of deposit (CD). Not sure which one is right for your savings goal and lifestyle? Let’s examine them both:
Certificate of Deposit
A certificate of deposit (CD) is a federally insured savings account with a fixed interest rate and term length. It’s ideal for savers who have a lump sum they want to deposit now and won’t need to access it in the immediate future or have a savings goal date in mind, like a vacation, tuition, or wedding.
- Typically pays a higher interest rate than standard savings accounts, but most financial institutions only allow you to make a one-time deposit at opening.
- The more you deposit, the more you earn. For example, if you deposit $5,000 into a CD with a 2% APY (annual percentage yield) for three years, you would earn $300 on top of your original deposit.
- Provides a guaranteed rate when you open one, so you’ll know exactly how much you’ll earn and don’t need to worry about rates dropping.
- Limits your access to your money for the length of the term, which can range from months to years.
- Penalizes you with a fee if you withdraw funds before they have reached maturity (the end of your term).
Some CDs—like FirstCapital Bank of Texas’ Two-Year Bump CD—give you both higher rates plus flexibility. With it, you can take advantage of raising rates and make additional deposits into your CD twice over the course of your term.
A savings account is also a federally insured, secure way to both separate your savings from everyday spending money and grow your deposits. It’s great for beginning savers who don’t have a large initial deposit or may need to access their money in the immediate future.
- Enables you to earn interest on your deposits, but it’s typically much lower than a CD rate.
- You can make as many deposits as you want to gradually grow your savings.
- The more you deposit, the more you earn.
- Does not offer guaranteed rates, so while you may earn more if rates rise, you will also earn less if they fall.
- Encourages you to save by allowing a limited number of withdrawals each month. (You will need to pay a fee if you surpass your allotted amount.)
Now that you better understand the differences and similarities of CDs and savings accounts, it’s time to invest in your future: Start saving today.