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CDs vs. Savings Accounts: Which One Is Right For You?

May 16, 2019
Posted by: Stearns Bank

Many people think that throwing their money into a savings account with a bank is the best way to building up their cash assets.

They do it because their parents did and they’re following what their family has always done. While savings accounts offer many benefits, another option is a higher interest CD to earn more in the long run.

Savings accounts can give you more flexibility to make withdrawals, but the option of having that higher return rate with a CD can be more beneficial. However, you have to be willing to leave your money alone for a set amount of time.

Both options offer guaranteed returns, but the best place to deposit your cash may depend on how long you’re willing to leave it in the bank.

Digging Deep On Savings Accounts

A savings account earns interest on your money while letting you withdraw from the account. However, federal law limits certain types of withdrawals on savings accounts to six per month.

A savings account is always good to have in case of an emergency. They offer quick cash solutions if an unexpected expense comes up. On the other side, CDs often charge a penalty to make early withdrawals.

To get the most out of your money, deposit it in a high-yield savings account. For example, if you deposit $7,000 into a high-yield savings account that compounds annually, has an annual percentage yield of 0.25 percent and you don’t touch it for a year, the balance would grow by $17.50.

Sure, that’s not going to allow you to retire early, but any extra cash can help.

You can always use our online calculator to see how much you would earn on a CD or savings account over time.

The Advantages Of CDs

If you’re certain you won’t need access to your cash for at least a year, many financial institutions offer CD terms of at least 12 months and have higher interest rates than savings accounts.

For example, if you put $7,000 in a CD that earns 0.55 percent annual percentage yield for a one-year term, your balance would go up by $38.50.

The worst thing about a CD is having to pay a penalty if you try to access your money before the term expires. In that case, you will forfeit all or part of the interest you earned, depending on the terms of the CD. Unfortunately, sometimes things happen and you have to bite the bullet.

CDs allow you to lock in a rate for the length of the term, which is great if interest rates fall. But if rates rise, you might end up earning less than if you had chosen a high-yield savings account.

You can lower your risk by creating a CD ladder. This involves opening several CDs with different terms of length instead of putting all your cash into a single account. As each shorter-term CD matures, you could move the balance into new CDs with longer terms and higher rates.

That would allow you to take advantage of higher rates while having regular access to maturing CDs.

Figuring Out What To Do

Every CD has a minimum opening balance and it’s usually more than savings account requirements. Do your research to find the account, term lengths, withdrawal restrictions and interest rates that work best for you.

Once you open your account, you’ll be able to sit back and watch your money grow over time. That’s the best part about savings accounts and CDs.

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