CD vs. Savings Account: Which Is Best?

Americans are saving less than ever before. According to an Empower survey, 1 in 3 Americans don’t have an emergency fund. Of those with an emergency fund, the median amount is $500. 

Regularly saving money, whether a little bit at a time or a lot, is one of the best ways to create and maintain financial security. But there are a few different places to stash your cash, including a certificate of deposit (CD) or a savings account. 

If you’re looking for a place to save money, WorkMoney compares CDs vs. savings accounts to show you which is the best for you.

CDs vs. Savings Accounts: At a Glance

While both types of accounts focus on savings, they work differently.

Savings Accounts

A savings account is for money you don’t need right away. It’s meant for you to put money into and not necessarily take out unless you really need it. Examples of when you should use money from your savings is for a necessary car repair, home repair, or medical emergency.

How Does a Savings Account Work?

After you open a savings account, you’ll make an initial deposit. This could be a few dollars or more, depending on the requirements set by the financial institution. In most cases, you can make unlimited deposits. 

Regular savings accounts typically earn less than 1% interest, while high-yield savings accounts earn competitive interest, depending on market conditions. These accounts come with variable interest rates, so when the Fed adjusts interest rates, your bank may also adjust rates on your savings account. While you might have an easy option of opening a traditional savings account with your current bank, you’ll earn significantly more money if you open a high-yield savings account.

Pros and Cons of a Savings Account

Pros

• Easy to open with minimal deposit restrictions.

• High earning potential through high-yield savings accounts.

• Access funds as needed, like in an emergency.

Cons

• Fluctuating interest rates.

• Not all financial institutions offer HYSAs.

• Could face fees if you don’t meet account requirements.

Who Are Savings Accounts Best For?

Savings accounts are best for folks who regularly put money into an account and earn interest from those funds. If you don’t have much to open your account and think you can regularly contribute to boost your savings, a savings account might be right for you. 

A savings account is best for building up an emergency fund, allowing you to tap into that fund without waiting for the terms to end.

CDs

CDs are a type of savings vehicle managed differently than traditional or high-yield savings accounts.

How Does a CD Work?

CDs are a time-based account. You’ll make a lump-sum deposit and earn interest on that amount through your terms. You can’t touch the account while it matures, or you could face an early withdrawal fee. When your terms are up, you can roll that money into a new CD, a savings account, or another type of account. There are no additional deposits and you don’t have access to those funds before the terms end.

CDs are a type of high-yield account, but how much you earn depends on:

• Your initial, lump-sum deposit

• The financial institution

• Account terms

Many banks set minimum deposit requirements for CDs. In some cases, you’ll only earn the highest rate when you select specific terms. 

CDs have fixed interest rates compared to variable rates for savings accounts. The trade-off is that you lock in a high rate in exchange for not touching your money for a set amount of months or years. 

Pros and Cons of CDs

Pros

• Fixed interest doesn’t change through the CD terms.

• Rates are higher than those of traditional savings accounts.

• One initial deposit you don’t have to monitor until maturity ends.

Cons

• Funds aren't accessible until the account matures.

• Some banks impose a high minimum opening deposit.

• Not helpful if you need your funds while they’re still maturing.

Who Are CDs Good For?

CDs are best for folks with a large, lump-sum deposit earning a competitive yield. These accounts are great for those who want to “set it and forget it.” Once you make your initial deposit, you don’t have to worry about the account until it matures. These accounts aren’t great for emergencies, as you could face early withdrawal fees.

CDs vs. Savings Accounts: Which One Is Best?

There’s no one-size-fits-all answer, since you could utilize both types of accounts for different needs. A savings account may work best if you:

• Want access to your funds whenever you’d like.

• Don’t have a large, lump-sum deposit.

• Need to establish an emergency fund with limited extra money.

• Access to a high-yield savings account that earns more interest than traditional accounts.

A CD account may work best if you: 

• Have a sizable opening deposit to earn competitive interest compared to savings accounts.

• Don’t need your money right away and are comfortable leaving it alone for a few months (or years).

• Can afford a large initial deposit to earn a competitive rate since you can’t make regular deposits to a CD account.

• Find an account with a competitive or higher interest rate than a high-yield savings account.

The Bottom Line

Even though CDs and savings accounts are two options, your choice depends on your needs and what you can afford right now. If you are financially capable of opening a CD and a savings account simultaneously, you could earn even more on your accounts down the road.