You finally have funds you can set aside for a rainy day, but you have no idea where the best place to “park it” may be. Two of the most popular choices, certificates of deposits and savings accounts, offer many advantages for new and seasoned savers alike. However, these two saving mechanisms work quite differently from one another and can make an impact on how quickly you achieve your savings goals.
The Differences Between a CD and a Savings Account
A certificate of deposit, or CD, locks in your money for a set amount of time, usually anywhere from a few months to a few years. In return, you may earn a higher interest rate than a regular savings account. At the end of the set amount of time, or term, you can generally renew it, withdraw the funds, or move into another CD without penalty.
A savings account is a type of deposit account offered by banks and credit unions that allows you to earn interest on the money you deposit. It’s designed for storing funds you may not need immediately, yet can keep your money accessible through withdrawals or transfers.
When a CD Might Make the Most Sense
If you’ve got money you don’t need right away, a CD may be a great option. You’ll lock in your funds for a specific term while earning a guaranteed rate for the entire period. This means no surprises and no market ups and downs to worry about. You’ll know upfront what the value of your CD account will be at the end of the term.
CDs are ideal for:
● Longer-term goals, like a down payment or college savings
● Extra cash you won’t need immediately
● Savers who want a guaranteed return without the temptation to spend
With this in mind, withdrawing before your CD matures usually means paying a penalty, which means it’s best to only commit funds you can afford to leave untouched for a while.
When a Savings Account May be a Better Fit
If you like having quick access to your money, a savings account is also fantastic. Need to cover an unexpected car repair or grab last-minute concert tickets? No problem. You can withdraw funds anytime and almost always without penalty.
Savings accounts are great for:
● Emergency funds
● Short-term goals like vacations or holiday shopping
● New savers who want to get in the habit of putting money aside
Savings accounts typically offer lower interest rates than CDs, but the flexibility often makes up for it (especially if you can’t predict when you’ll need access to your money).
How to Choose Between a CD and Savings Account
Keep in mind, you can always choose both a CD and savings account option, but if you can only start with one at first, then:
● Consider your access needs: Whether you need flexibility or are okay with locking away your funds.
● Compare interest rates: CDs generally pay higher, fixed rates, while savings accounts offer lower, variable rates with easier access.
● Think about your goals: If they’re short-term or longer-term and what you need the funds for.
Whether you’re saving for something big or just starting to plan ahead, both CDs and savings accounts can help you make your money work harder. Space Age Credit Union offers both options and we’re happy to help you find the right fit. Be sure to ask us about our Specialty CDs, the Safety Net and Balance Builder for even more control of your savings.
