CD vs. Savings Account: What’s the Smarter Investment Right Now? (2024)

FAQs

CD vs. Savings Account: What’s the Smarter Investment Right Now? ›

That means a CD may pay a little less right now than a leading savings account. But if interest rates decline while you still hold the CD, you'll likely win later, when savings account rates have dropped but your fixed CD rate keeps delivering its original rate.

A certificate of deposit offers a fixed interest rate that's usually higher than what a regular savings account offers. The tradeoff is you agree to keep your money in the CD for a set amount of time, typically three months to five years.

A high-yield savings account generally pays a higher interest rate than the national average for savings accounts. However, a CD often pays a higher interest rate than a high-yield savings account. As of April 2024, several banks and credit unions were offering high-yield savings accounts with APYs above 5%.

Deciding between CD or savings account

When to consider a savings account: You need the money to be accessible, like an emergency fund. You're saving for a smaller or relatively short-term goal. You're primarily putting money aside instead of trying to grow it.

Bottom line. When deciding between a long-term CD or putting money in the stock market, always take into account your goals and how long you'll need to achieve them. For long-term plans like retirement, the market offers better returns than locking up your cash in a CD.

A CD may offer a higher interest rate and APY than a high-yield savings account or money market account. Returns are virtually guaranteed and you can easily estimate how much your money will grow. CD laddering strategies can help you to leverage changing interest rates and create liquidity.

One major drawback of a CD is that account holders can't easily access their money if an unanticipated need arises. They typically have to pay a penalty for early withdrawals, which can eat up interest and can even result in the loss of principal.

CD accounts earn less on average than the stock market and mutual funds. That's the trade-off of getting a guaranteed return versus the unpredictable swings of market investments. When you lock in a CD rate, it might not grow your money enough during high inflation periods when prices are going up.

Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.

Although each financial situation is unique, it doesn't typically make sense for you to keep all of your money in a high-yield savings account. After all, most high-yield savings accounts limit withdrawals to only six per month, so a checking account is typically a better place to store your spending cash.

How much does a $10,000 CD make in a year? ›

For example, if you deposit $500 in a five-year CD that earns a 5.15% APY, your balance by the end of five years will be $642.71, earning you $142.71 in interest. However, if the interest rate is 3.25%, your earnings will only be $586.71, a difference of $56 in interest earnings.

Unlike most other investments, CDs offer fixed, safe—and generally federally insured—interest rates that can often be higher than the rates paid by other bank account types. And CD rates are generally higher if you're willing to commit to longer periods.

Waiting to open a CD could mean missing out on some stellar rates. Now, you can lock in high rates on both short-term and long-term CDs, and you can score some serious interest just by opting to deposit a larger lump sum into your CD.

CD interest rates are high in 2024 — higher nationally, on average, than they've been in more than a decade, according to Forbes Advisor. Whether a CD is worth it right now also depends on why you're saving money, how soon you need your funds and whether rates rise or fall in the next year or five years.

Losing money in a CD is highly unlikely. However, it's not impossible. If you're thinking about opening one, read the fine print about early withdrawal penalties, and be sure to compare more flexible options that don't have a maturity date. And even if you decide to open a CD, don't set it and forget it.

Along with savings accounts and money market accounts, CDs are some of the safest places to keep your money. That's because money held in a CD is insured. So long as you purchase your CD account through an FDIC-insured bank, you're covered in case the bank shuts down or goes out of business.

If you're saving for a medium- or long-term goal, want to earn a fixed interest rate and want the assurance that your money is safe, a CD can be a good investment. If you need access to your money, a money market account would be more fitting as it offers greater liquidity.