There are many different types of investments that people can choose from, but one question they often ask is “What is the difference between CDs and savings accounts?” The answer to this question may seem simple at first glance, but there are a lot of nuances when you get into it. This blog post will cover everything you need to know about CD rates and savings accounts so that you can make an informed decision.
What are CDs and Savings Accounts
CDs stand for Certificates of Deposit, while savings accounts are just what you think they would be – a place to put your money for safekeeping.
CDs and Savings Accounts: How They Work
Both CDs and savings accounts require some type of initial investment to get started with the account. The minimum amount that can usually be deposited is between $500 to $2000 depending on the financial institution.
The Interest Rate Difference
The main difference between CDs and savings accounts is that you earn a decent interest with a CD when your money is invested over a long period, while the amount in your savings account earns little to no interest, or if it does, it may fluctuate based on the changes in market conditions. In terms of the former, you will have a good idea of the best CD rates when you take the time to explore reputable online sources. Even though there are other differences, the interest rate difference alone could be a major factor that can impact your decision when choosing between CDs or savings accounts.
The Time Difference
Both the CDs and savings accounts are considered safe investments because they are insured by federal organizations, but there is another key difference between them that you need to know about – maturity dates. With a CD, your money will be locked into an investment until it matures, which means you will not be able to access your money until that time. With a savings account, however, you can withdraw your funds whenever you need them without any penalty fees or other charges from the financial institution.
When to use a CD or a Savings Account
There are various reasons that you may want to use a CD or a savings account. For example, if you are saving for retirement and would like to maximize your interest rate, then an online CD might be the best choice for you. On the contrary, if having access to your money is more important than maximizing investment gains, then it could make sense to choose a savings account instead.
Nevertheless, you can always open both a savings account and a CD to diversify your portfolio, while still enjoying superior interest rates on the money that you are not immediately using. In this case, you can reflect on what is important for you when it comes to investing. You should think about whether you care more about liquidity or earning maximum returns with your initial investments. These two factors should guide your decision when choosing between CDs and savings accounts.
Benefits of using a CD or a Savings Account
A CD will prove to be beneficial when you need to preserve your capital and want to earn a higher rate of return than what is offered by an online savings account. A CD will also work well when you don’t like the idea of being able to withdraw from your investment at any time. For example, if you already have enough savings to use in the event of an emergency or you are thinking of saving up for retirement, then there is no need for you to withdraw your money anytime soon.
On the other hand, a savings account will be better when you want liquidity and access to your money and are less interested in maximizing investment gains by using CDs or other forms of investments. Like a CD, an online savings account is also insured up to $250,000 per customer – which makes it another safe place for you to put your money.
It is best to keep the money that you need immediate access to in case of an emergency separate from any retirement goals or long-term financial goals for which you would like to maximize investment returns. For example, if most of your investments are going towards paying off debt and building up an emergency fund, then a savings account will be the right choice for you.
Potential Drawbacks of Using a CD or a Savings Account
Using a CD will be of a disadvantage if you need to access your money quickly for an emergency. Despite their many benefits, CDs are considered less liquid than savings accounts because they have early withdrawal penalties and lock-in periods which can be inconvenient for some customers trying to meet certain financial goals.
For example, you may need to use a CD early if your child has decided that college is not the right choice for them and they want to start their own business instead. In this case, it will be difficult for you as a parent to withdraw from your CD without incurring penalties or missing out on higher interest rates that could have been earned if the money was left intact.
On the contrary, a savings account will not be beneficial if you like the idea of earning higher returns on your investments. Because savings accounts offer lower interest rates than CDs and other forms of investment, you may end up losing out on market gains that could have been earned if you used a CD instead. This is why it’s important to do thorough research before choosing between using a CD or a savings account.
CDs and savings accounts are a great way to grow your money. When deciding which type of account is right for you, it’s important to consider what you want from the account in terms of how much risk you’re willing to take on with your investments. If safety is most important, then a CD might be best suited for you because all interest earned during this period will remain in the bank until the maturity date. A savings account may offer higher rates than a CD from time to time but can fluctuate based on market conditions at any time. Just keep in mind that the kind of investment that would work best for you depends on your specific needs and preferences.
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