CD vs. Savings Account

Both CDs and savings accounts offer ways to grow your savings with no risk. Those who want to build an emergency fund may prefer the flexibility of a savings account, while those saving for longer-term goals might want the greater returns of CDs.

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  • Updated: September 20, 2022
  • This page features 11 Cited Research Articles
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APA Schell, J. (2022, September 20). CD vs. Savings Account. Annuity.org. Retrieved September 24, 2022, from https://www.annuity.org/personal-finance/banking/certificate-of-deposit/cd-vs-savings-account/

MLA Schell, Jennifer. "CD vs. Savings Account." Annuity.org, 20 Sep 2022, https://www.annuity.org/personal-finance/banking/certificate-of-deposit/cd-vs-savings-account/.

Chicago Schell, Jennifer. "CD vs. Savings Account." Annuity.org. Last modified September 20, 2022. https://www.annuity.org/personal-finance/banking/certificate-of-deposit/cd-vs-savings-account/.

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How Do CDs and Savings Accounts Compare?

If you’re looking to save up for a short term goal like a down payment on a house or a new car, you might consider putting your money in a savings account or in certificates of deposit (CDs). Both can help you earn interest on your savings with minimal risk involved, but how do you know which one is right for you?

Let’s look at how these two bank products compare.

Issuers and Terms

Both CDs and savings accounts are issued by banks or credit unions. CDs have a maturity term, which can be anywhere between three months and five years, during which no money can be withdrawn from the account without paying an early withdrawal penalty.

Savings accounts do not have a maturity term, and most savings accounts do not charge a penalty for withdrawals. Some high-yield savings accounts may limit depositors to a certain number of withdrawals per month. And if your bank requires a minimum account balance to waive fees, you won’t be able to withdraw all your money without penalty unless you close the account entirely.

Initial Deposits

Whether you’re opening a savings account or a CD, you’ll have to deposit some money into the account to get started. For savings accounts, the minimum initial deposit is low, usually between $25 and $100. Once you’ve opened a savings account, there’s no limit to what you can deposit into the account. You can add money to the account whenever you want.

Certificates of deposit tend to have a higher minimum deposit, because for most CDs, that’s all the money that you will ever contribute to the account. Some banks have no minimum deposit for certain types of CD, but at most banks, CD minimum deposits range from $500 to $1,000.

You won’t be able to continue contributing to your CD balance once you make the initial deposit, unless you purchase a special type of CD called an add-on CD. The terms of an add-on CD vary, but generally you can continue adding money to the CD up to a maximum amount or until you reach a maximum number of add-ons permitted during the CD’s term.

Interest and Return Rates

The interest rate of a traditional savings account is extremely low, usually only 0.01% APY. This means that if you kept $10,000 in a savings account for a year, you’d only earn $1.00 in interest. A high-yield savings account might have an APY closer to 1.0%. So, if that $10,000 went to a high-yield savings account for 1 year, it would earn $100.00 in interest.

The interest rate of a CD depends on the issuing bank and the length of the CD’s term. The longer the term, the higher the APY. As of July 2022, the national average APY for a one-year CD is 0.39%, but you can find rates as high as around 2.0%. A five-year CD has a national average rate of 0.60%, but rates for these longer-term CDs can be found as high as 3.0%.

Interest Earned in Savings Accounts vs. CDs (July 2022)
Account Type
Example Interest Rate
Interest Earned on $10,000 Deposit Over 1 Year
Traditional Savings
0.01%
$1.00
High-Yield Savings
1.0%
$100.00
1-Year CD
2.0%
$200.00
3-Year CD
2.6%
$260.00 (1st year of 3-year term)
5-Year CD
3.0%
$300.00 (1st year of 5-year term)
Source: Discover Bank

Penalties, Fees and Risks

If your bank has a minimum balance requirement for savings accounts, you may have to pay a fee if you withdraw too much from your account at once. Otherwise, you probably won’t pay any fees on your account. And you can always look for an account with no minimum balance if you’re just starting out saving money.

Generally, banks won’t charge you a fee to open or maintain a CD. As previously mentioned, you will likely have to pay an early withdrawal fee if you take money out of your CD before it matures. However, some banks do offer no-penalty CDs with lower APYs that allow you to withdraw money without paying a fee.

Insurance

Both savings accounts and certificates of deposit are fully insured by the Federal Deposit Insurance Corporation (FDIC), and as such are considered very safe places to put your money. FDIC insurance covers up to $250,000 per depositor per bank for all accounts. Savings accounts and CDs are not covered separately, so if you have a savings account and a CD at the same bank, you’ll only be covered for up to $250,000, not $500,000.

If you have more than $250,000 in cash assets that you want to put in a CD or savings account, your best option is to hold your money in accounts at multiple banks to ensure full federal deposit insurance coverage.

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When Is a CD Your Best Option?

If you’re saving up for a specific goal that’s a few years out, such as a wedding celebration or down payment on a home, putting your money in CDs might be a good choice. Your money will grow more quickly than a savings account due to the higher APY of CDs, which can help offset the effects of inflation on your investment.

For those who want to take advantage of the high interest rates of long-term CDs without keeping all their money locked away for years, CD laddering is a useful strategy. This personal finance concept refers to purchasing multiple CDs with different maturity dates and dividing your savings among them. As the shorter-term CDs mature, you can choose to withdraw the money without penalty if you need it or redeposit the money with the interest earned into a new CD.

Putting your savings in a CD can also help you if you tend to dip into your savings account for unnecessary purchases. The early withdrawal penalty you’ll face from taking money out of your CD can help you fight the temptation to withdraw funds for expenses that aren’t essential. On a related note, CDs are not a great place to keep an emergency fund for unexpected expenses, as you will not be able to take your money out of the CD early without paying a penalty.

When Is a Savings Account Your Best Option

If you’re working on building up your emergency fund, a savings account is a great option. With a savings account, especially a high-yield one, you’ll earn interest on your deposit, helping grow your savings over time. And you can withdraw money whenever you need it.

Savings accounts are also a good place to keep money you’re saving for a smaller, short-term goal. This could be a down payment on a car or a nice vacation. If you’re not sure when you’ll need this money or know that you’ll need it within a year or two, locking it away in a CD doesn’t make as much sense. A high-yield savings account could earn you almost as much if not the same amount of interest with no penalties for taking your money out.

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Last Modified: September 20, 2022
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11 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. Discover Bank. (2022, March 30). Online Savings Account. Retrieved from https://www.discover.com/online-banking/savings-account/
  2. Egan, J. and Strohm, M. (2021, November 24). Bank Account Minimum Deposit and Minimum Balance Requirements. Retrieved from https://www.forbes.com/advisor/banking/bank-account-minimum-deposit-minimum-balance-requirements/
  3. Federal Deposit Insurance Corporation. (2022, March 21). National Rates and Rate Caps. Retrieved from https://www.fdic.gov/resources/bankers/national-rates/
  4. Federal Deposit Insurance Corporation. (2021, July 1). Are My Deposit Accounts Insured by the FDIC? Retrieved from https://www.fdic.gov/resources/deposit-insurance/financial-products-insured/
  5. Financial Industry Regulatory Authority. (n.d.) Savings Accounts. Retrieved from https://www.finra.org/investors/learn-to-invest/types-investments/bank-products/savings-accounts
  6. Gran, B. (2022, September 15). CD vs. Savings Account: How to Choose. Retrieved from https://www.forbes.com/advisor/banking/cd-vs-savings-account-how-to-choose/
  7. Gravier, E. (2022, March 1). Here Are the Best CDs of March 2022. Retrieved from https://www.cnbc.com/select/best-certificates-of-deposits/
  8. Lake, R. (2022, March 25). CD Early Withdrawal Penalty: What You Should Know. Retrieved from https://www.forbes.com/advisor/banking/cds/cd-early-withdrawal-penalty/
  9. Marquit, M. (n.d.) How to Build a CD Ladder (Infographic). Retrieved from https://www.depositaccounts.com/blog/how-to-build-a-cd-ladder.html
  10. TIAA Bank. (2022, March 25). Basic CD. Retrieved from https://www.tiaabank.com/banking/basic-cd
  11. Tumin, K. (2016). Searching for the Elusive Add-on CD. Retrieved from https://www.depositaccounts.com/blog/searching-elusive-addon-cd.html