CDs vs. Savings
While most people have a simple savings account, not everyone has a Certificate of Deposit. Both are fairly simple to open, so what are the main differences between the two?
- A CD typically has a term length of a few months to a few years. After the CD matures, you can cash out. A savings account can be stored indefinitely.
- You can withdraw your money from your savings account whenever you'd like, but your money stays in the CD until the term length has been reached.
- While both savings account and CDs will accrue interest over time, a CD is usually a higher-interest option.
Why Choose a Savings Account?
If you prefer to have very fluid funds, then the savings account is probably the better option. Withdraw your money from a CD prematurely, and you'll face a penalty. Savings accounts may generate far less interest, but they are much more forgiving. You can easily withdraw the money you need for an unexpected emergency, for example.
Why Choose a CD?
While the terms of a Certificate of Deposit may be stricter, you can shop around to find the term length that you want. Some CDs mature after just a few days, while others take years to do the same. That means you have a little more flexibility than you might initially think. Plus, you can yield quite a bit more money from a smart investment. If you have money sitting in your savings account, you can put it in a CD to grow much more quickly than even a high-yield savings account. What if you need emergency cash? You can either pay the penalty or consider an alternate source, like a cash advance or payday loan.
Strategic Investing
If you're intimidated by the long-term investment of a CD, consider a strategy known as "laddering.” Some investors divide their savings into several CDs and stagger the maturation. For example, you can invest your $10,000 into a single five-year CD, but that will tie up your funds for half a decade. What if you split that sum into five $2,000 CDs that mature at different times? As each CD matures, you can roll it into a new account. Ideally, you'll have a CD that matures every year. This allows you to take advantage of favorable interest rates, while offering greater flexibility than a single large investment.