CD vs. Savings Account: Which Should I Choose?

Photo illustration to accompany article comparing CDs and savings accounts Getty Images

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CDs beat savings account rates slightly these days, but the difference isn’t drastic enough to make this choice a complete no-brainer. Remember, with a CD you are likely committing to lock your money up for a certain period of time or face an early withdrawal penalty. If you’re OK with that requirement and eager to take advantage of marginally better rates than a high yield savings account, then a CD might be for you.

However, if flexibility is still important to you for the funds you’re setting aside, you aren’t losing much by opting for a savings account. Rates are a far cry from their pre-pandemic peak (you’d be lucky to score a rate above 0.50% nowadays) but you’re only missing out on a couple basis points by opting for a savings account instead of a CD. 

Read on for our assessment of savings accounts and CDs in this low-rate environment.

Savings Account

Savings accounts are the MVPs of bank accounts. Along with checking accounts, they are an essential part of a solid personal finance plan. They’re also a foundation upon which you can expand to other bank and investment accounts later on. 

So when we ask the question “savings account or CD?” it’s posed with the understanding that, even outside the current rate environment, savings accounts should hold your emergency savings and other cash you may need immediate access to — whether it’s $100 or $10,000. 

Every bit counts, especially with high-yield savings accounts that offer exponentially more earning potential in the form of interest than conventional brick-and-mortar bank saving accounts. 

“Emergency funds should be in a savings account, preferably a high-yield savings account,” says Ally-Jane Ayers, co-founder of New York financial planning firm Brooklyn Fi. “Something you can access quickly and easily is important.”

Brent Weiss, chief evangelist of Facet Wealth, a financial planning firm in Baltimore, agrees. 

“These accounts are great for your emergency fund, a house down payment, a new car down payment, a house maintenance fund or anything else that is larger in size and planned for the next two to five years,” he says.

Though savings accounts are subject to a six-monthly-transaction limit, they do offer liquidity that other investment accounts (including CDs) do not. If you need to pull funds out of your emergency savings — to cover, say, a car repair or lost income from being unemployed — you won’t be penalized for withdrawing money (barring any minimum balance requirements).

When choosing a high-yield savings account, look for a bank that does not charge monthly maintenance fee or any minimum balance requirements that you won’t be able to meet.

CDs

CDs offer typically higher interest rates than standard checking and savings accounts — but they come with a catch. You typically need to agree to lock your money away for a fixed period of time, between 6 months to 10 years.  The longer your CD term, the more lucrative the rate typically is. This can be valuable for savings goals that may have a date attached, such as future college tuition or saving for a house. 

If you withdraw funds early, you typically have to pay a penalty which can eat into the interest accrued and even the principal, depending on when the maturity date of the CD is and other account terms.

These days, CD rates are marginally higher than savings rates, but they don’t beat them by much. You might choose a CD if you don’t need the money for the foreseeable future and you want to hedge against future rate drops, by locking in the current-best rate. If you currently have a CD, then it’s best to not mess with it right now, says Ayers. “Stay the term. When it expires, do some shopping and see if your CD rates are going to be as good as a high-yield savings account.”

Ultimately, whether you save in a savings account or CD depends on how much you value the potential benefits versus the potential drawbacks (i.e., losing easy access to your savings with a CD). It’s best to do the math for yourself to see how much you stand to gain from opening up a new account or adding to an existing one. You may find a meager difference in rates may not warrant much in earnings after all.

How to Choose 

Ultimately, the choice between a savings account and CD will come down to a few key factors: 

  • Liquidity. If you need easy access to your funds, a savings account is the best way to go because you don’t risk any penalties for making withdrawals. Keep in mind, however, that you are limited to 6 withdrawals per month with most savings accounts or you’ll incur an excessive withdrawal fee. 
  • How soon you need the funds. If you’ve got emergency cash tucked away in a liquid savings account, and you still have cash to spare, a CD may make more sense. It will likely give you a higher rate of return than keeping your cash in a standard savings account. 
  • Your appetite for risk. If you can stomach more risk and you’ve got money to invest for more than, say, five years, you might want to bypass a savings account and CD altogether. Instead, look at investing your extra cash in a brokerage account or even contributing more to your retirement account. 

Know, however, that you can have it both ways. You don’t necessarily need to choose one or another when it comes to savings and CDs. You might benefit from having both types of accounts. They can provide security and safety for savers who are weary of the ups and downs of the stock market, as they both come with FDIC insurance up to certain limits.  

How to Open a Savings Account

  1. Compare several accounts. In rate-sensitive environments like the one we’re currently in, it’s important to compare savings account rates at multiple banks to be sure you’re getting the best deal out there. Online banks tend to offer the most generous rates but you might also find luck with a local credit union or community bank, especially if you’ve already established a relationship there. 
  1. Watch out for fees and fine print. There’s no sense in signing up for a savings account with a juicy APY offer if you get hit with fees for not meeting certain account requirements. Always read the fine print. 
  1. Open your account online or in person. You can easily open a savings account online these days by visiting a bank’s website. They’ll typically ask for basic information like your name, address and date of birth. They’ll also ask for your social security number. This shouldn’t land on your credit file as a hard inquiry, so don’t worry about a credit score ding. Many banks simply run your SSN through a system like ChexSystem to review your bank history before deciding whether to approve or deny you. 
  1. Get approved and fund your account. If you’re approved, you typically will be asked to deposit funds into your account. You can do this via cash or check if you’re applying in person or fund your account electronically if you’re opening it online. You may be required to deposit a minimum amount.

How to open a CD

  1. Shop and compare CD rates. There are a plethora of online comparison sites you can use to shop and compare rates on CDs, and it’s highly recommended that you do your research. Credit unions, community banks and online banks offer the most generous rates, so these types of institutions are a good place to start your search.
  1. Look at fees and fine print. With CDs, watch out for early withdrawal penalties, minimum deposit requirements and term limits. You may find no-penalty or low-penalty accounts but don’t expect to get the most lucrative rates in return. Along those same lines, if an account offers a very generous rate, expect to have to lock your funds up for much longer and put down a hefty minimum deposit. Credit unions often offer solid CD rates, but they will likely require you to become a member or meet some other criteria like donating to a charitable cause.
  1. Fill out an application. Open your CD account by filling out the bank’s form either in person or online. They’ll ask for your name, date of birth, address and other personal information. 
  1. Choose your interest preference.  Banks will give you a choice of when to earn interest on your CD, such as monthly, annually or in a lump sum when your CD matures. If you’re quite sure you won’t need to make an early withdrawal and you don’t mind waiting, opting for the lump sum at the end of your term is likely the best way to maximize interest. 
  1. Fund your account. With a CD, you make a one-time deposit and that’s it. You typically aren’t allowed to add funds to your account. 
  1. Set a calendar alert for your renewal date. Some CDs will automatically renew their term when they expire, and if you’re not keeping an eye out, you might end up locking your money up for longer than you planned.