CD vs. savings account: What you need to know

As you plan for life's milestones, such as buying a house or saving for your child'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 help you save for the future.

These accounts earn interest to grow your savings, but you may want to consider one over the other depending on your financial goals. Here's a look at how a CD vs. savings account compares to help you find the right fit for your situation.

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. Here's what you should know about CDs:

• When you set up a CD, you can often choose from different term lengths, such as six months or one year.
• You can build a CD ladder with varying terms to maximize your earnings.
• You could owe a withdrawal 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, but not as much as a CD account. It's designed to help you safely store money while earning a modest return, making it ideal for building an emergency fund or saving for short-term goals. Here's what else to know about savings accounts:

• A savings account can stay open as long as you want and doesn't have a fixed term like a CD.
• You can deposit and withdraw money with no penalties, up to account limits.
• You may face some withdrawal limitations, like no access to checks or debit cards for purchases.

How does interest work on a CD vs. savings account?

CDs and savings accounts base their rates on several factors, including the Fed funds rate, macroeconomic variables and financial institution strategy. A change in any of these factors could influence interest rates. For example, when the Fed lowers the target rate, CDs and savings accounts may pay less interest.

Both types of accounts often advertise interest rates as an annual percentage yield (APY). This is the total amount of compounded interest you'd earn in one year. One notable difference between a CD and a regular savings account is what happens to the APY after you open the account:

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

APY example for a savings account vs. CD

After years of diligent saving, suppose you have $100,000 and want to buy a house in under two years. You'd like to earn as much interest as you can until then to support a down payment. If you put the money in a 14-month CD with a 3.10% APY, you'd earn about $3,622.25, assuming interest compounds daily.

Now let's say you have another $10,000 in cash savings and you're not sure when you need the money, so you keep it in your savings account as an emergency fund. If the APY is 0.02%, compounding daily, and you don't make any additional deposits, you'll earn $2.00 after one year.

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. Let's look at additional pros and cons of CDs and traditional savings accounts:

Pros of a CD

• Offers higher interest rates than most savings accounts.
• Locks in a fixed interest rate that won't decrease over time.
• Ideal for long-term savings goals.
• Encourages saving discipline since funds are inaccessible for a set period.

Cons of a CD

• Funds are locked for a specific term. Early withdrawal may incur penalties.
• Not suitable if you might need access to your money soon.
• You may miss out if interest rates rise after you lock in your rate.
• Requires having other liquid savings for emergencies.

Pros of a savings account

• Provides easy and convenient access to your money.
• Allows flexible deposits and withdrawals at any time.
• Suitable for short-term savings goals.
• Offers interest earnings while keeping funds readily available.

Cons of a savings account

• Typically pays lower interest than CDs.
• Interest rates can fluctuate and may decrease over time.
• Easy access may make it tempting to spend the money.

CDs vs. savings accounts: How do these accounts compare?

Whether you choose to put your money in a savings account or a CD depends on your short-term and long-term financial goals. Looking at a side-by-side comparison of interest rates, deposit terms, access, deposits and fees can help you figure out which account will best serve your needs now and in the future.

How do I open a CD or savings account?

You can 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.

For a savings account, you'll need to deposit money to fund the account. This can be as little or as much as you want, depending on whether the account has minimum balance requirements.

With a CD, 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, so weigh when you'll need the money back versus the interest rates.

Types of CDs

When you open a CD, you’ll also need to decide which type you want. Some possible CD 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, as much as $100,000. In exchange, these CDs can pay higher rates.
• Liquid: Liquid CDs let you cancel early to get your money back without a penalty, but the interest rate could be lower.
• Callable: With callable CDs, the bank could close the account and return your money before the term ends, for example, if interest rates are falling and banks can borrow money for less.
• IRA: IRA CDs are part of an individual retirement account. The IRA delays taxes on your interest earnings as long as the money stays in your account.

Kickstart your savings with a CD or savings account

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