When a CD vs. savings account is right for you

As you plan for life's milestones such as buying a house or saving for your kid’s college, some financial know-how and planning can help you put your money to work. Keeping your money in a certificate of deposit (CD) or a savings account are two ways to do just that.

These bank accounts earn interest to grow your savings for the future, but you may consider one over the other depending on your financial goals. Here's a look at how CDs vs. savings accounts compare so you can find the right fit.

We'll cover these topics:

• What is a CD?
• What is a savings account?
• How do interest rates change on CDs and savings accounts?
• Should I open a CD or a savings account?
• CDs vs. savings accounts: How do they stack up?
• How do I open a CD or savings account?

What is a CD?

A CD is a type of savings account that earns interest over a fixed period of time or term. CDs limit access to your savings during the term length. In exchange, they usually pay higher interest rates than other bank deposit accounts.

• When you set up a CD, you decide how long you want the term to last.
• A CD term can be a few months up to 10 years.
• You could owe a penalty if you cash out before the CD maturity date.

What is a savings account?

A savings account is another deposit account that earns interest. It usually pays a higher interest rate than a checking account but lower than a CD.

• A savings account can stay open as long as you want; it doesn't have a fixed term like a CD.
• You can deposit and withdraw money on your schedule with no penalties, up to a set limit.
• You'll face some withdrawal limitations, like no checks or debit cards for purchases.

How do interest rates change on CDs and savings accounts?

CDs and savings accounts both base their rates on the Federal Reserve interest rate target, the same as any bank deposit account. When the Fed increases the rate target, CDs and savings accounts pay more interest. When the Fed lowers the rate target, CDs and savings accounts pay less.

One notable difference between CDs and traditional savings accounts is what happens to the interest rate after you enroll:

• With a CD account, the bank agrees to pay the listed interest rate on your money for the entire term length. In other words, you know exactly what you'll earn the whole time.
• With a savings account, the bank adjusts your interest rate to match market conditions. Your earnings can go up and down over time.

Your annual percentage yield (APY), or the total amount of compounded interest you'd earn in one year, would follow the same pattern — locked in for a CD and open to fluctuation for a savings account.

The average two-year CD pays 1.51% per year, while the average savings account pays 0.45%, according to the FDIC. These are just the average, so some pay more.

Should I open a CD or a savings account?

CDs typically pay higher interest rates than savings accounts but charge a penalty for cashing out early. Savings accounts usually pay lower interest rates than CDs but let you withdraw or deposit money when you want without penalty. Beyond these key differences, you might choose a CD or a savings account for a few reasons:

Consider an example of when you might choose a CD or a savings account. After years of diligent saving, say you stored up $100,000, and you have your eyes set on buying a house in two years. You'd like to earn as much interest as you can until then to support a down payment and any additional closing costs on your house. You might put the money in a two-year CD, paying 3% a year. In two years, you'd have around $106,000, depending on how the interest compounds.

Say instead you have another $20,000 in cash savings and you're not sure when you'd need the money. You could be considering it for your emergency fund. If you put the $20,000 in a savings account, earning 1% a year, you'd get an extra $200 a year in interest, and your money is there whenever you need to fall back on it or add to it.

Canceling a CD early leads to an early withdrawal penalty that reduces your interest earnings and sometimes even part of your deposit. Keep other money for emergencies outside your CD so you aren't forced to cancel.

CDs vs. savings accounts: How do these accounts stack up?

How do I open a CD or savings account?

You open CDs and savings accounts with banks or credit unions. The enrollment process is similar for both. The bank will ask you to provide your Social Security number, driver's license and contact information. You'll also need to deposit money to fund the account, as little or as much as you want (depending on whether the account has minimum balance requirements).

With a CD, you need to plan a bit more. First, you decide how much you want to put in the CD as your initial deposit. You also choose how long you want the CD to last. Weigh when you'll need the money back versus the interest rates. You also should decide on the type of CD. Some of the possible options include:

• Standard: These are regular CDs, where the bank lists the interest rate for each available term, whether short or long.
• Jumbo: Jumbo CDs require larger deposits, perhaps $100,000. In exchange, they can pay higher rates.
• Liquid: Liquid CDs let you cancel early to get your money back without a penalty. The interest rate could be lower, though.
• Callable: With callable CDs, the bank could close the account and return your money before the term ends. This might happen if interest rates are falling and banks could borrow money for less.
• IRA: IRA CDs are part of an individual retirement account (IRA). The IRA delays taxes on your interest earnings as long as the money stays in your account.

Both CDs and savings accounts can help you save money for the future. You could earn more with a CD if you don't mind committing to a set term, whereas a savings account is better for convenient access to your money.

Interested in opening a CD or savings account with Citizens? Learn more about our CDs rates and options, or explore our savings accounts.