CDs vs. Savings Accounts: Where to Put Your Extra Money

Certificates of deposit (CDs) and savings accounts both provide a secure place to store funds and earn interest. Savings accounts offer greater flexibility, while CDs typically pay higher interest rates.

It’s common to keep some extra funds in your checking account, but when cash reserves start to build up, your money isn’t working as hard as it could. Moving a portion of the funds to a CD or savings account gives you the opportunity to earn interest while still keeping it secure.

While both may be beneficial, they work in different ways. Choosing the best option for your needs starts with understanding the core differences between a CD vs savings account.

What Is a Certificate of Deposit (CD)?

A certificate of deposit is a type of deposit account that offers a fixed interest rate in exchange for leaving the money untouched for a specified period of time, which may range from a few days to many years. When the time period ends (known as the maturity date), the account holder regains access to the funds along with the full amount of interest earned. 

What Is a Savings Account?

A savings account is a deposit account that provides a safe place to store money while earning interest on the balance. Unlike CDs, savings accounts allow ongoing deposits and withdrawals. Rates are typically variable and lower than CD rates, due to the account’s flexibility.  

CDs vs. Savings Accounts: A Side-by-Side Comparison

CDs and savings accounts are both secure options for storing money, but they serve different purposes and have different features.  

Feature	Certificate of Deposit	Savings Account
Interest rates	Typically higher, fixed for the term.	Typically lower, may change over time.
Withdrawal flexibility	Early withdrawals often incur penalties.	Withdrawals available at any time, though some accounts may limit free withdrawals.
Maturity periods	Fixed terms ranging from a few days to over 10 years.	No set term, funds can stay in the account indefinitely.
Minimum deposit requirements	Often requires larger initial deposit.	Often has low or no required initial deposit.
Safety and insurance	FDIC-insured up to the applicable limits.	FDIC-insured up to the applicable limits.

Interest Rates

CDs typically offer higher interest rates to offset the limited access to funds. Savings account rates are commonly lower than CDs, but since they adjust with market changes, this may be a benefit when rates start to rise.

Withdrawal Flexibility

Savings accounts allow you to withdraw funds at any time, making them a popular option for emergency funds and short-term savings goals. CDs restrict withdrawals until the maturity date, and withdrawing early often results in a penalty.

Maturity Periods

Savings accounts do not have a maturity period. Funds may remain in the account indefinitely. CD maturity periods range from a few days to more than 10 years, depending on the product.  

Minimum Deposit Requirements

Savings accounts may have low or no opening deposit requirements, making them accessible to most savers. On the other hand, CDs commonly require a larger opening deposit, which may range from a few hundred to several thousand dollars.

Safety and Insurance

When opened at insured institutions, both CDs and savings accounts are covered by the Federal Deposit Insurance Corporation (FDIC) up to applicable limits. This makes them both a safe place for holding cash reserves.

Pros and Cons of CDs

To determine whether a CD is suitable for your needs, it’s essential to consider both its potential advantages and limitations.

Pros:

• Higher interest rates: CDs often have higher rates than savings accounts, especially when they have longer terms.
• Predictable returns: The fixed interest rate and specified maturity make it easy to calculate exact earnings over the term.
• Safety: FDIC insurance protects deposits up to applicable limits.
• Discipline: Withdrawal penalties may help reduce the temptation to access funds early.

Cons:

• Limited access to funds: If you need to make a withdrawal before the maturity date, penalties typically apply.
• Less flexibility: Once you purchase a CD, the rate and term are not adjustable.
• Potential for lost opportunities: If interest rates rise before the maturity date, you’ll lose the opportunity to invest in a higher-paying option.
• Minimum opening balance: Many CDs require a larger opening balance compared to a savings account.

Pros and Cons of Savings Accounts

Savings accounts are a common banking product, but they’re not right for every situation. Here are a few potential benefits and drawbacks to consider.

Pros:

• Flexibility: You may deposit or withdraw funds at any time.
• Accessibility: With low or no minimum opening balance requirements, savings accounts are accessible to many individuals.
• Safety: FDIC insurance protects deposits up to applicable limits.
• Cons:
• Lower interest rates: Standard savings accounts typically pay less than CDs.
• Variable returns: Interest rates may fluctuate, making it harder to predict earnings.
• Temptation to spend: Easy access to funds may make it harder to resist taking withdrawals.

Which Option Is Right for You?

Several factors may influence whether a CD or savings account is right for your specific situation. Here are a few common scenarios where each option may be a better fit.

Best Scenarios for CDs

CDs may be appropriate when you’re seeking stability and a guaranteed return. This may include:

• Saving for a future expense with a set timeline. This allows you to earn higher interest while also deterring early withdrawals.
• Earning interest without market risk. Once locked in, CDs offer predictable returns regardless of current conditions.
• Increasing earnings on idle funds. If you have cash you won’t need for a while, a CD may provide better returns than leaving it in a checking or savings account.

Best Scenarios for Savings Accounts

A savings account may be the preferred choice when access and flexibility are more important than earning a specific interest rate. Common uses for savings accounts include:

• Building or maintaining an emergency fund. Easy access to funds makes savings accounts ideal for covering unexpected expenses.
• Saving for short-term goals. Savings accounts allow you to make ongoing deposits and withdraw funds without a waiting period.
• Holding reserve funds. When linked to a checking account, savings accounts enable you to keep your money separate while still being able to access it quickly if needed.  

Key Questions to Ask Yourself

Still unsure which savings option may be suitable for your situation? Before making a decision, ask yourself these questions:

• How soon will I need the money? If it’s within weeks or months, a savings account may be a better fit. Otherwise, a CD may provide greater value.
• How much flexibility do I want? Savings accounts allow easy access, while CDs do not allow additional deposits and penalize early withdrawals.
• Am I comfortable committing funds for a set time? CDs typically pay higher interest in exchange for locking in funds until the maturity date. Savings accounts give you the freedom to make withdrawals anytime.
• Are interest rates expected to rise or fall? CDs lock in the current rate, while the rates on savings accounts typically adjust with market conditions.

Can You Combine CDs and Savings Accounts?

Many people choose to put money into both CDs and savings accounts to meet different goals. Keeping a portion of cash reserves in a savings account gives you flexibility to cover short-term expenses. Placing additional funds that aren’t needed right away into a CD may increase earning potential.

Other Savings Options to Consider

There are several other options for growing your savings with minimal market risk. Depending on your goals and preferences, these alternatives may be suitable for your needs.

High-Yield Savings Accounts

A high-yield savings account (HYSA) offers ongoing deposits and withdrawals, much like a standard savings account, but typically pays a higher interest rate. Some HYSAs may require a larger initial opening balance or have minimum ongoing balance requirements. 

Money Market Accounts

Some financial institutions' money market accounts (MMAs) combine features of both savings and checking accounts. They typically pay higher interest rates than standard savings accounts while also providing a debit card for withdrawals.  MMAs may require a larger opening deposit and a higher minimum account balance.  

CD Ladders

A CD ladder is an investment strategy that involves opening CDs with different maturity dates rather than placing all the funds in a single CD. For example, instead of committing all your funds to a five-year CD, laddering may spread the funds out among five CDs that mature one per year over a five-year period. This provides predictable access to funds while still allowing you to earn higher rates on longer-term CDs.

Final Thoughts

All of these savings options offer a secure way to grow your money, but they each have unique features. When weighing your options, consider whether you prioritize flexible access to funds or higher interest rates. For some, a mix of CDs and savings accounts may help meet both short-term and longer-term goals.