Protecting Your Privacy: We will never call or email you asking for money. There is no fee to apply. Close

Choosing a Certificate of Deposit (CD) vs. a Savings Account

Cds vs savings accounts

What Is A Certificate Of Deposit

A certificate of deposit (CD) is a form of investment offered by banks, brokers and credit unions that are one of the best risk-free way to invest your money. Most certificates of deposit offer a fixed interest rate and require one to keep their investment in the CD for a predetermined amount for them to reach maturity. Generally three months to five years. One of the best aspects of a CD is that the interest is compounded until they reach maturity, meaning you will be earning interest on interest. Much like savings accounts, most CD's are FDIC or NCUA insured, and offer smaller returns than more high-risk investments such as a stock portfolio. The majority of CD's require a minimum deposit of up to five thousand dollars. The more money you  invest combined with the length of time till maturity, are the main deciding factors in what your interest rate will  be. The only downside to a certificate of deposit is that in most cases your money must be kept in the CD until it  reaches maturity, otherwise you will be faced with substantial penalties which could be high enough to where you end up losing money. Thus you should only invest in CD's if you know you will not need to withdraw the investment for unforeseen reasons down the line.

The Types of Certificates Of Deposit

Traditional Certificate Of Deposit

These are the most common type of CD used, and offer a fixed rate of return that makes them easy to understand and manage. Most traditional CD's require little to no minimum deposit, and can range from three months to five years for maturity. These are a wise choice for first timers and those wanting a simplified and risk-free investment.

Variable Rate Certificate Of Deposit

A variable rate CD will leave you more exposed to risk, but generally offer a higher interest rate than a traditional CD. The way they differ from a traditional CD is that your interest rate is tied to market indexes. Which means you are betting on the market favoring you over the time it takes for your CD to reach maturity.

Callable Certificate Of Deposit

Callable CD's offer a higher than normal return due to the bank's ability to 'call' back your investment after a predetermined amount of time if they feel the investment is no longer in their favor.

Bump-Up Certificate Of Deposit

This form of CD differs from others by the account holders ability to increase the CD's interest rate one time. This is a great way to invest in CD's if you feel that interest rates will increase after your initial investment and you want to take advantage of that change.

Step up/Step Down Certificate Of Deposit

Much like Bump up CD's, a step up/down CD will have a changing interest rate. But with this form of CD it starts off as a fixed rate, and after a set amount of time is either raised or lowered to a predetermined rate for the duration of the CD.

Zero Coupon CD

These CD's are offered at a heavily discounted price due to the extremely long maturity time of up to twenty years. And unlike most certificates of deposit, interest is not paid until the CD has reached maturity.

Liquid Certificate Of Deposit

A Liquid CD is ideal for those who know they may need to withdraw funds from the CD at some point during the term. Most will still have some restrictions as to when, how much and how often you can withdraw funds.

Add-On Certificate Of Deposit

Add on CD's are exactly as they sound. You may add more to your CD down the road, though some restrictions will apply. Such as a minimum additional deposit, and may require a waiting period before you may do so.

Brokered Certificate Of Deposit

Brokered CD's are managed by brokerage firms that sell large sum CD's to multiple investors who take a share of the CD. Due to the larger overall investment by the group, interest rates can be substantially higher than if you were to invest on your own.

What Is A Savings Account

Savings accounts are by far the easiest way to safely store your money while also paying interest on your deposit. They are FDIC insured up to one hundred thousand dollars, and allow for withdraw of funds at anytime. Making them the best option for those who do not know if they could keep their money in a CD until it reaches maturity.

The downside to this form of investing is that it is pretty much the lowest return possible due to it being entirely risk free, and with the ability to withdraw funds at anytime.

A recent addition to savings accounts is the 'online only' accounts which will pay a slightly higher interest rate but lack in person customer service.

Graph of 1 year standard fixed rate of cd and savings account

Choosing a Certificate of Deposit (CD) vs. a Savings Account

There are several key factors to take into consideration when deciding between a certificate of deposit (CD) vs. a savings account. There are also a number of different types of CDs to choose from, depending on what the customer’'s specific needs for the money will be.

If you will need to withdraw funds from this investment from time to time, a CD is not the best choice and a savings account is the better choice. If you are willing to take any risks for larger profits, variable rate brokered or callable certificates of deposit are better choices than a savings account.

If you can wait for a long time for a CD to mature, a zero coupon or bump up CD is the best choice. If you can only wait for a CD to mature for the short term, these are not the best financial choices. If there is a chance that you will need to withdraw funds from the CD before it matures, don’t choose a traditional fixed rate certificate of deposit. Instead, choose a liquid CD.

One-Year Standard Fixed Rate of CD and Savings Accounts

Discover CDs pay an APR of 1.75 percent and the APY is 1.73 percent. The minimum balance is $2,500. American Express CDs pay an APR of 1.50 percent and the APY is 1.49 percent. The minimum balance is $0. Capital One CDs pay an APR of 1.75 percent and the APY is 1.73 percent. The minimum balance is $5,000. AIG CDs pay an APR of 1.60 percent and the APY is 1.59 percent. The minimum balance is $2,500. Bank of America CDs pay an APR of 1.10 percent and the APY is 1.09 percent. The minimum balance is $1,000.

Discover savings accounts pay an APR of 1.00 percent and the APY is 1.00 percent. The minimum balance is $2,500. American Express savings accounts pay an APR of 1.50 percent and the APY is 1.49 percent. The minimum balance is $0. Capital One savings accounts pay an APR of 0.55 percent and the APY is 0.54 percent. The minimum balance is $0. AIG savings accounts pay an APR of 1.30 percent and the APY is 1.29 percent. The minimum balance is $10,000. Bank of America savings accounts pay an APR of 1.10 percent and the APY is 1.09 percent. The minimum balance is $300.