Savings Account vs. CD: What is the difference and which one might be right for you?
When you’re trying to be intentional with your money, one of the questions you may have is whether you should put your money into a savings account or a certificate of deposit (CD).
Both can be great tools for saving money, but they work a little differently, and knowing what works best for you and your needs is key. The biggest difference really comes down to how accessible you want your money to be and how long you’re willing to leave it untouched.
But let’s take a look at each option in more detail.
Savings Accounts
A savings account is the most flexible place to start when you’re building your savings. You deposit your money into the account, it earns interest, and you can continue adding to it as you go. You can also access your money anytime you need it, although there may be limits on certain types of transactions. Maybe you’re building an emergency fund. Maybe you’re saving for a family vacation, a new vehicle, home improvements, or another purchase you’re hoping to make within the next year or so. A savings account allows you to keep adding money and access it when you need it.
Savings accounts also generally have relatively low minimum balance requirements, making them an easy place to start if you’re just beginning to save.
At federally insured institutions, like Somerset Trust Company, deposits are insured up to $250,000, which provides another layer of protection for your money.
Another thing to keep in mind is that savings account interest rates are variable. Meaning the rate can change over time depending on market conditions. The amount of interest you earn today may not be the same amount you earn a year from now.
And one of the best parts about banking with Somerset Trust Company is that we have zero maintenance fees on our savings accounts. This allows every penny saved to remain a penny earned, keeping it in your pocket.
For many people, that flexibility makes a savings account a good option for things like:
- Emergency funds
- Short-term savings goals
- Money you may need within the next year
- Saving for a large upcoming purchase
- Getting started with saving
- Teaching children the basics of saving and compound interest
What About a CD?
A certificate of deposit, or CD, works a little differently.
With a CD, you agree to leave your money deposited for a specific period of time, known as the term. Depending on the CD, that could be anywhere from a few months to several years. In exchange for committing your money for that period of time, CDs typically offer a fixed interest rate, which is often higher than a traditional savings account.
When you open a CD, the bank agrees to pay the stated interest rate for the entire term. So unlike a savings account, where the rate can change, you know what rate you’re earning and can estimate how much your money will grow. And there’s something nice about knowing exactly how much your money can earn over time.
The tradeoff is that your money isn’t as accessible. If you withdraw your money before the CD reaches maturity, you will typically have to pay an early withdrawal penalty, although some financial institutions offer penalty-free CD options. That’s why it’s important to think about when you’ll actually need the money before putting it into a CD. You don’t want to put your emergency fund into a CD and then find yourself needing that money unexpectedly.
Just like a savings account, CDs are also federally insured up to $250,000, so you can rest assured your savings are safe.
So Which One Should You Choose?
The answer really depends on your savings goal. Think about it this way:
If you need flexibility, a savings account may make more sense.
If you have money you don’t need right away, a CD may be worth considering.
If you’re building an emergency fund, you probably want that money somewhere you can easily access it. A savings account can give you that flexibility.
But maybe you’ve already set aside your emergency savings and have another chunk of money that you know you won’t need to access immediately. A CD could allow that money to earn a fixed rate while you leave it alone.
CDs can also be useful for longer-term goals where you want to earn interest without putting the money into investments that fluctuate with the market.
One More Thing to Think About
Interest rates matter.
Because savings account rates can change, your rate could increase or decrease over time. With a CD, you’re locking in the rate when you open the account. That can work in your favor when rates are falling, because you’ve locked in a higher rate. But if rates rise after you’ve opened your CD, you may miss out on those higher rates because your money is committed to the CD term. It’s another reason to look carefully at the different CD terms and rates available before opening one.
Saving Doesn’t Have to Be Complicated
At the end of the day, both savings accounts and CDs can be useful tools. They just serve different purposes.
A savings account gives you accessibility and flexibility, while a CD gives you a fixed rate in exchange for committing your money for a specific period of time.
You don’t necessarily have to choose just one. You might use a savings account for your emergency fund and short-term goals while using CDs for money you’ve set aside for something further down the road.
The important thing is to understand how each option works and choose the account that fits your goals, your timeline, and your comfort level. Sometimes growing your savings isn’t about finding one perfect place to put your money. It’s about giving each dollar a purpose and choosing the right tool to help it get there.
