While most people are familiar with a savings account, not everyone knows what a Certificate of Deposit (CD) is, or how similar it actually is to a standard savings account. Over time, CDs have become less and less common due to historically low interest rates. And by CD we’re not talking about the one you put in a CD player (though those have faded away too), we’re talking about a Certificate of Deposit! There are pros and cons to CDs and Savings accounts, and today we’re going to tell you what they are!
Before we compare the two, let’s make sure everyone knows what a CD is. A CD is a deposit that earns interest over a designated period of time, is not easily accessible and has a fixed withdrawal date. We’ll explain the details of it here shortly, but that is the basic definition of a CD. So without further ado, let’s jump to it!
Pros and Cons of a CD
Pro: Higher interest rate
One of the big benefits to opening a CD instead of a normal savings account is the higher interest rate. This means more money in your pocket when the CD matures. That in itself seems to be the better option, but there’s obviously much more to it, otherwise everyone would choose to open a CD.
Con: Locked in for a period of time
Once you make the deposit, you’re unable to withdraw the funds prior to the maturity date without paying a penalty. If you’re worried you might need the funds before that date, then perhaps a traditional savings account is best for you. Now, if you have money saved up elsewhere, this likely doesn’t affect you near as much. That being said, there are different lengths of time for which you can open a CD. Central offers terms as short as 90 days, and as long as five years. This allows more flexibility for you and your money, so don’t let the maturity date deter your interests.
Pro: Great Long-term benefits
It’s been touched on already, but we’ll make sure we’re clear. The higher rate makes a CD a great option for long-term savings goals without putting money into riskier investment opportunities. Putting money in a secured account where the interest is fixed is more stable, and a great option for saving for a vacation that is years away, a college fund, or even saving for retirement.
Con: Normally requires larger sum to open
This may not be an issue for all, but needs to be pointed out regardless. CDs normally require you to make a larger deposit than a savings account to open the account. This may be an issue if you don’t want to have a large sum of cash locked in for an extended period of time. The smallest CD offered at Central is a minimum of $1,000 to open, while a savings account has a minimum of $30 to open.
Neutral: Fixed rates
One of the benefits, or perhaps a drawback, of a CD is the fact that the interest rate remains fixed for the term of the CD. When the economy slows and banks need less money to lend the interest rates paid on savings accounts and CDs will decrease. If you locked in your fixed rate CD during a period of retreating rates, you will be very happy with your decision. To the contrary, when the economy is humming and banks are making more and more loans they will need more deposits, resulting in higher rates paid on your deposits. When you lock in a fixed rate CD and the prevailing rate increases by 10 or 20 basis points, it may sting.
Pros and Cons of Savings accounts
Pro: Money is available to you
This is the biggest difference between a savings account and a CD. You do have access to the money in the account. If you get in a bind, no need to worry; you can take it out of your account to help you through the rough patch. This makes a savings account more appealing for those without much of a financial cushion.
Con: Limit of 6 transactions a month
Some consider this a pro since a CD doesn’t allow money to be taken out at all without penalty. It depends how you look at it. To be clear, this isn’t a rule made by your bank, this is a law that all banks have to follow. It encourages savings. This is the big differentiator that makes a savings account different from a checking account. If you go over 6 debits from your account in a month, your account could be penalized. In the event you continually withdraw more than 6 times per month your account could be changed to a transaction account or even be shut down. You will be warned and notified before this is done, so don’t worry too much about a sudden closure of your account, but you will want to limit the account usage. Remember, it is set up to help encourage saving over spending.
Pro: Great for short term savings goals
If you just need a little help saving that last bit to achieve your savings goal, a savings account could work well for you. Having the money set aside could be the difference in making your goal or not. It also is a good account type to open for an emergency fund. A savings account would be a good place to temporarily put money off to the side while allowing it to earn a little interest.
Con: Lower interest rate
A savings account will have a much lower interest rate than that of a CD. If you don’t put much into the savings account, you will not notice much of an increase resulting from interest deposits into the account. When you’re trying to get the maximum return, this is where a CD would be a better option.
Pro: Can be opened for various amounts
Like was mentioned earlier, CDs require larger deposits to be made while savings accounts can be opened for as little as $30. If you’re just beginning to save up money, a savings account would be a better option since you don’t need as much to start the account. Set a goal to turn that savings into a CD down the line!
Con: Minimum Balance requirement
While it might be nice not having to put as much into the account to open it, there is a minimum that would need to be kept in the account to avoid a monthly fee. If the balance ever dips below $100 at any point during the month, there would be a $2 fee assessed to your savings account. And that may vary by institution. Over time you will build up enough to avoid the fee.
Hopefully, this article is full of useful information that increased your knowledge of CDs and savings accounts. While they are very different, they are also similar in various ways. If you are interested in learning more, visit one of our branches, or call our toll free number at 888-262-5456.