We seek the highest yield for savers.
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For example, for more than a decade throughout the 2010s, savings accounts and certificates of deposit (CDs) were among the lowest-yielding assets. But following a series of rate hikes by the Federal Open Market Committee in 2022 and 2023, banks have started paying commensurate interest.
Placing your money in a CD or savings account is one of the safest ways to manage your cash while still earning yield. But what is the difference between them? And where can you get the most out of your safe investment funds? Let’s take a look at CDs and savings accounts, and how to choose between them.
Important points
Savings accounts are designed for short- to medium-term goals rather than daily expenses. CDs are designed to store money for a set period of time, with maturities ranging from three months to 10 years. In general, the longer your money is, the longer your money is. The more you are tied up, the higher the yield on offer.
CD Accounts and Savings Accounts: An Overview
CDs and savings accounts are both cash deposit accounts and are considered relatively safe, at least when it comes to storing your money.
Both types of accounts are protected by the Federal Deposit Insurance Corporation (FDIC) as long as you open the account with a participating institution. FDIC protection allows protection of up to $250,000 per depositor in accounts with the same bank. You can have multiple secured accounts with the same bank within that limit. Also, if you’re worried about exceeding the FDIC limits, you can spread out your responsibilities by opening accounts at different institutions.
Although CDs and savings accounts have some similarities, there are also some important differences.
What is a savings account?
Savings accounts are designed to help you save toward a goal or set aside money for an emergency fund. You can access your savings account several times a month, but there are limits on withdrawals.
Savings accounts are generally not meant to be used for day-to-day transactions (they are checking accounts). As long as you follow the limits, savings accounts are considered savings accounts and can earn you a higher yield than interest-bearing or money market checking accounts.
What is a CD?
A CD is a savings account, similar to a savings account. However, the Federal Reserve considers this to be a “time limit” deposit account, meaning that money is kept in the account for a set period of time. Banks typically offer CDs with maturities of 3 to 60 months. You may also be able to obtain a brokered CD with a 10-year maturity that is designed to be kept in an Individual Retirement Account (IRA).
With a CD, the higher interest rate compensates for keeping your funds locked up until maturity. You can usually withdraw your funds before maturity, but you will be charged several months’ worth of interest if you do.
There are various types of CDs. Some don’t charge penalties for early withdrawals, but may offer lower yields than those with less flexibility.
Key differences between CD accounts and savings accounts
Because CDs have a set maturity, they are less liquid than savings accounts. Long-term CDs often have higher yields than savings accounts. Savings accounts may have minimum requirements, and you may be charged a monthly “maintenance” fee if you use the account. below that minimum. However, the minimum value is usually lower than the minimum required to open a CD. Additionally, most banks offer special low- or no-fee savings accounts for young savers.
Whether you use a CD account or a savings account depends on your goals and the intent of the account. In fact, there is a good chance that using both types of accounts at the same time can be financially beneficial, even though they serve different purposes.
In times like these, consider a savings account…
You need money that you can use immediately, such as an emergency fund. I save for short-term goals, like a big purchase or a holiday at the end of the year. You want your money to be safe and liquid (you can withdraw it at any time). Instead of trying to increase it for future wealth, give notice immediately. Your starting balance is too small to purchase a CD (and you qualify for a low-fee or no-fee account). You want to connect your savings account to your checking account. Backup for overdraft protection. This avoids fees and “dishonored” checks if you don’t have enough funds to clear the charge. You want to take advantage of variable interest rates in a higher interest rate environment without opening a new account. account.
Consider CDs if…
You don’t need immediate access to your money and can afford to keep it “locked up” for longer periods of time. You need money for a down payment on a house or for larger medium- to long-term goals, such as a down payment on a home. It’s to buy a car. You want to take advantage of better long-term yields and safely grow your money near or above the inflation rate. You plan to ladder your CDs (stagger their maturity dates) to provide balanced funding. You want to maintain a certain relatively high cash yield over a long period of time.
conclusion
Rather than depositing and withdrawing money whenever you want, a CD is a “time limit” account.
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Although yields are currently higher than they have been in the past, there is no guarantee that they will remain high in the future. You can look at different banks and credit unions to find higher yields on both CDs and savings accounts.
If you want to take advantage of a higher interest rate environment and increase your cash savings, you can lock in your interest rate with a five-year CD or create a long-term ladder. But please do some research. When the Fed began its tightening cycle in 2022-2023, some short-term maturities actually had higher yields than longer-term maturities. This is another reason why a ladder CD portfolio can be beneficial.
Even with favorable interest rates, CDs, savings accounts, and other fixed income investments (such as government and corporate bonds) may not help you achieve your long-term goals. Bond yields can have a hard time keeping up with inflation.
To build long-term wealth and grow your retirement savings, consider a diversified asset allocation that includes stocks, stock indexes, and even alternative investments such as real estate and precious metals.
