Choosing between a CD or Savings Account
Monday, 21 October 2019
Congratulations. You've worked hard – or maybe scored a windfall—and now you've got some money to put away.
Where can you keep it so it works hard for you—and so it can suit your needs?
There are several options, most notably, a savings account or a CD (common for “certificate of deposit"). Many banks now offer online CDs so customers can open and manage accounts on their mobile device. In some cases online CDs may offer higher rates than CDs purchased in a brick-and-mortar branch. Why and how? Because an online CD account may cost the bank less in facilities and labor and attract more customers from a wider market than a CD sold in the branch on the corner.
Are CDs worth it?
When you have money to save that you don't need immediately—but might want to spend down the line—a CD is a great choice. You earn higher interest than you would on a savings account, and you've also got an incentive not to touch it for a period of time you designate, usually 12, 18 or 36 months.
So for example, if you wanted to park $5,000 for three years earning 1.3 percent interest compounded daily, you'd have $5,198.85 when the term is over. It's like getting nearly $200 for free, without having to lift a finger.
Compound interest is interest that accumulates on the original principal amount plus whatever interest it's earned in a set period of time -- daily, monthly or annually. Simple interest only takes into account the deposit's principal sum, regardless of the interest it earns along the way. (The U.S. Securities and Exchange Commission has a calculator that helps you understand how money grows with compound interest.)
CDs vs. savings
- Unlike an investment account, the balance on your CD doesn't ever go down, so your money (plus the accrued interest) will be there at the end of the contracted term.
- CDs are a great place to park money for a long-term goal, such as a vacation, home project, or a major purchase.
- Make sure you're not going to need this money before the term is over, because there is an early withdrawal penalty. If you're not sure, put some in savings.
- Most banks have a minimum deposit requirement and a maximum deposit limit.
Is a savings account worth it?
Savings accounts may pay less interest than a CD, but they offer more flexibility if you need it. For instance, if you think you may need access to your money for emergencies, then a savings account is a better option. Most savings accounts allow for a certain number of withdrawals or transfers each month without penalty. Also, a savings account allows you to put away a little bit every month, every week, or even every day if you want, and the deposit requirements are much lower.
The choice between a CD or savings account really depends on individual preferences and needs. Be sure to fully understand the benefits and restrictions of any savings vehicle so you can determine if it fits your needs.
The content provided is for informational purposes only. Neither BBVA USA, nor any of its affiliates, is providing legal, tax, or investment advice. You should consult your legal, tax, or financial consultant about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA USA or any of its affiliates.
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