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Certificate of Deposit (CD) vs. Savings Account: Which Is Better

Andrew Secker, Private Banker, First Republic Bank
October 26, 2021

There are lots of options when it comes to saving money, but, not all savings vehicles function the same way, they can often differ greatly in value and conditions. While it may not seem like there’s a big difference between certificate of deposit (CD) accounts and savings accounts, the truth is there are significant pros and cons with each of them.

Making the choice between a CD and a savings account depends on your financial situation, plans for the money in the account and how often you need to access funds. Here’s what you need to know in order to make the right choice.

What’s a savings account?

A savings account is a bank account that gains interest at a variable rate over time. These accounts are typically offered by banks, credit unions and other financial institutions, and they often accrue interest at a variable rate, which adds to the account’s balance over time.

Advantages of a savings account

Savings accounts often come with higher interest rates than checking accounts, which may offer no interest or less interest than most savings accounts. The more money you put into the account, the more interest you earn on your balance. You’ll also enjoy:

  • Flexibility: A savings account allows you the flexibility of keeping your cash liquid, so you can access it more frequently (some accounts may be limited to 6 transactions per month). Most accounts come with an ATM card, making it easy to withdraw money when you need it.

  • Earned interest: A savings account is also a financially savvy place to store your emergency funds. High-yield savings accounts provide access to these funds while still earning interest on your balance. This can translate into significant savings the more you have saved.

  • Security: Federal Deposit Insurance Corporation (FDIC) insurance keeps your savings secure. The FDIC insures up to $250,000 per account owner, per insured bank. This means you can rest easy knowing that your money is secure within your savings account.

  • No lock-in periods: You can add and withdraw funds with more flexibility, rather than keeping your money in your account for a set period of time.

Disadvantages of a savings account

There are also drawbacks to savings accounts. Here are a few considerations to keep in mind when opening a savings account:

  • Variable interest rates: With savings accounts, a variable APY (annual percentage yield) means the interest rate can change over time as dictated by market conditions. This can make it difficult to estimate how much you’ll earn in interest over time.

  • Extra fees: Some financial institutions may charge monthly fees for account holders to maintain a savings account. You might be able to avoid these fees depending on bank-specific factors, like your account balance, as well as any other accounts you might have open with the bank.

What’s a Certificate of Deposit (CD)?

Certificates of deposit are bank accounts where the account holder agrees to keep money in the account over an agreed upon time period. The funds in that account increase in value thanks to a fixed interest rate over the set amount of time (the “term”). Banks and other financial institutions offer several term lengths (e.g., 7 days, 1 month, 3 months, 6 months, 12 months, 18 months, etc). The length of the term can correspond with an increase in the interest rate, but this can fluctuate depending on market conditions. Oftentimes the longer you lock in a CD, the more interest the financial institution offers you but this can vary. There are pros and cons to CDs, however. Here’s what you need to know.

Advantages of a CD 

There are several advantages to taking out a CD, such as: 

  • Higher interest rates: Depending on the type of account and market conditions, a CD often yields a higher interest rate than other traditional savings accounts.

  • Security: The FDIC insures up to $250,000 per account owner, per insured bank, just like it does for savings and other deposit accounts.

  • Predictable returns: In contrast with other savings accounts, CDs offer predictable, guaranteed returns on the funds you put in. You set aside a specific amount, at a fixed rate, for a specific amount of time, and don’t have to worry about performance.

Disadvantages of a CD 

There are also a few potential downsides to opting for a CD. Here’s what to consider before you open a CD:

  • Early withdrawal penalties: The money in your CD is locked for a set period of time and can only be withdrawn at maturity. If you withdraw early, you may face significant penalties for doing so.
  • Requires proactive monitoring: If your CD term is longer than one month, your bank will likely let you know when your term is about to expire. If you somehow miss these notifications, however, your account could automatically roll over into a new CD under the same term. This would limit your ability to access your cash before that term expires.

What are the similarities between a CD and a savings account?

CDs and savings accounts share many similarities, such as their insurance by the FDIC guarantee and their interest-bearing status. There are other similarities and differences, however—each of which provides different positives and negatives for prospective account holders.

 

CDs

Savings Accounts

Interest Rates

Fixed interest rate throughout the term of the CD

Variable interest rate that fluctuates over time based on market conditions.

Fees

Does not charge fees

May charge maintenance fees

Withdrawal Limits

Withdrawals may only be made at maturity

Some banks may have restrictions on the number and type of withdrawals allowed per statement cycle

Adding Funds

Funds can only be added at maturity

Unlimited deposits

With this in mind, consider which tool might make the most sense for you. First Republic Bank savings accounts can help you reach your short- and long-term goals alike. You can also look into First Republic’s CDs and liquid CDs for other options to help make the most of your money.

Should I choose a CD or a savings account?

If you’re trying to decide between a CD or a savings account, think about your specific financial goals. If you’re looking for flexibility and are willing to earn a lower interest rate in order to have access to cash, a savings account might be the right choice for you. On the other hand, if you’re looking to get the most out of your savings and don’t need to access cash outside of specific time windows, then a CD could be the right choice.

Additionally, liquid CDs give you a guaranteed interest rate for a specific period of time while still giving you penalty-free access to withdraw money at least every seven calendar days. If you make withdrawals that are not at least seven days apart or your balance falls below a certain point, your bank could charge you withdrawal penalties.

No matter which option you choose, the most important thing to do is plan wisely. A good financial strategy often includes some form of liquid savings—be it through a savings account or a CD. These accounts help you keep your money within arm’s reach and can offer you opportunities to grow your money through interest payments.

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