CD vs. Savings Account: What's the Difference?

It's more than just interest rates

A woman shops for savings accounts and CDs using her computer
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Table of Contents

Savings accounts and certificates of deposit (CDs) keep your money safe and pay interest. They’re both an excellent choice for funds you might need to spend within the next few years, but they have different features that are important to know. Differences between the two include interest rates and ability to access funds with no penalty.

What's the Difference Between Savings Accounts and CDs?

  Savings Account Certificate of Deposit
Flexibility Withdraw money anytime Penalty for early withdrawal
Interest Rates .04% to .50% but could change at any time .50% to 1.5% and are fixed for the duration of the CD
Minimum Funds to Open Account As low as $5 Usually at least $1,000

Flexibility

Savings accounts are more flexible than CDs. You can withdraw funds without penalty at any time, and you can make ongoing deposits to a savings account. But that doesn’t mean you should rule out CDs.

CDs are ideal for funds you need at a specific future date. For example, if you know you’ll pay tuition in 19 months, an 18-month CD may maximize your interest earnings. Alternatively, if you have extra cash that you want to keep safe, with no intention of spending the money soon, a CD may be useful.

You can usually cash out a CD early, which might be necessary if you need emergency cash beyond what you have in a rainy day fund. If you withdraw money from a CD early, you'll typically pay early withdrawal penalties, which can wipe out any interest you earn and eat into your original principal deposit. Some CDs, known as liquid CDs, allow you to withdraw funds early, but be sure you understand the details before you use those instruments.

Savings accounts are ideal for cash you might need to access at any time and the money you plan to spend in the next six months or so. For example, a savings account is an excellent place for a small emergency fund or a cash cushion that you transfer to checking to avoid overdrafts.

Savings accounts allow you to deposit and withdraw with minimal restrictions. In April 2020, the Federal Reserve amended Regulation D by deleting the six-per-month limit on convenient transfers from "savings deposits." They’re easy to work with and easy to understand.

Interest Rates

CDs are time deposits that require you to commit to leaving your funds in an account for a minimum length of time. For example, you can buy CDs for terms as short as three months and as long as five years. In return, your bank or credit union offers to pay higher rates as you commit to longer maturities.

CDs provide a guaranteed interest rate that typically doesn’t change. If you think interest rates will rise soon, a savings account might make more sense. But if you’re happy with a CD’s interest rate and you’re willing to lock up your money, a CD can work well.

With a CD, you can predict exactly how much you’ll earn. Most banks set your rate at the beginning of the CD, and that rate never changes. That works in your favor if interest rates stay the same or drop, but you might miss out on extra earnings if rates rise significantly.

Banks typically pay higher interest rates on CDs than they do for savings accounts. That’s especially true as you go with longer terms (a two-year CD should pay more than a three-month CD). All other things being equal, rates tend to be higher on CDs vs. savings accounts.

Unlike CDs, savings accounts feature interest rates that can change over time. Banks adjust savings account rates in response to the economic environment, competition, and their desire to take in funds in the form of deposits. If rates are rising, your savings account might pay more next month than it pays now (although banks are slow to increase rates). But if rates fall sharply, banks typically respond by paying less, while your earnings would not change if you were in a CD.

Minimum Funds Required to Open Account

Savings accounts allow you to start small, so they work well when you have limited funds. After that, there’s nothing wrong with keeping significant balances in savings, as long as you do it intentionally. CDs, on the other hand, sometimes have minimum deposit requirements. Brick-and-mortar banks may require you to invest at least $1,000, but several online banks offer CDs with no initial minimums.

A Best-of-Both-Worlds Option

Fortunately, you don’t have to choose between CDs or savings accounts. You can use both, and other alternatives may also meet your needs.

  • Keep enough cash in a savings account to meet any near-term needs. You’ll have easy access to that cash, and you won’t face penalties if you need to withdraw funds occasionally.
  • Consider using CDs for some of your excess cash if you have sufficient cash in savings, you like CD interest rates, and you’re not concerned about rates rising.
  • Look to other alternatives if CDs are too restrictive for your taste but savings accounts don’t pay enough. Money market accounts have features of both CDs and savings accounts, but they often pay slightly more than standard savings accounts. Cash management accounts may also offer higher earnings. Just be sure that your funds are FDIC insured if safety is important to you (NCUSIF insurance at credit unions is just as safe).

The Bottom Line

If you know you'll need access to your money in less than a year, a savings account might be best. Savings accounts are also ideal if you're just getting started with saving money and only have a small amount to start with. Interest rates are very low on savings accounts, but if you search around, you can find high-yield savings accounts.

If you want to earn higher interest and can do without your money for at least a year, a CD is a good choice. You will need at least $1,000 to open an account. CDs work well if you already have enough money in savings to cover you in the event of an emergency.