Let’s discuss the difference between a savings account and a Certificate of Deposit (CD), both of which have unique features to help meet specific financial goals.
Understanding Savings and CD Accounts
What is a savings account?
Embarking on the journey of financial management often begins with a savings account.
A savings account is a deposit account for which you receive interest. This is a safe and reliable investment and allows for your money to be what is called ‘liquid,’ or easy to make both deposits and withdrawals. A savings account is a great option on your path to savings and investing, helping you with both short-term and long-term financial goals.
What is a Certificate of Deposit (CD) Account?
While a Savings Account offers much flexibility on depositing and withdrawing, a Certificate of Deposit (CD) account is a savings option that is time-bound. With a CD, individuals deposit a lump sum of money for a fixed period, ranging from a few months to several years, in exchange for a predetermined interest rate. While not as flexible as a Savings Account, restricting access to funds until a set maturity date, CDs offer higher interest rates, making them ideal for individuals seeking to maximize returns on their savings.
What are the key differences between a Savings Account and a CD?
Liquidity
Savings accounts offer flexibility, allowing for frequent withdrawals and deposits without penalties. CD’s on the other hand, allows you to withdraw your money before a maturity date, but there penalties for early withdrawals. The benefit of the CD of course is that it offers higher interest rates in return for ‘locking’ your investment for a set period of time.
Interest Rates
While both savings accounts and CDs generate interest, CDs typically offer higher rates, especially for longer-term deposits. This higher yield reflects the commitment to keeping funds locked away for a specified time-frame.
Term and Maturity
Savings accounts have no fixed term (or time that it must be held by the bank within the account), which provides ongoing access to funds. CDs, however, have predetermined terms ranging from months to years, with interest earned upon maturity.
So, which one is right for me?
Choosing between a savings account and a CD depends on your individual financial objectives and needs. If you need flexibility and easy access to your funds on a regular basis, then a Savings Account may be more appropriate. On the other hand, if you have some additional funds, then a longer-term investment offering higher interest rates may be the way to go, and a CD is right for you.