CD vs. savings account differences: Which is right for you?

When it comes to saving money, experts can all agree on one thing: It’s a good idea. For one, savers are better prepared to handle emergencies and more likely to reach long-term financial goals. Plus, taking steps toward financial security and long-term goals can lower stress. And who couldn’t use some better sleep at night?

Once you decide to save, you need to pick where to put your money. Two savings options to consider are certificates of deposit (CDs) and savings accounts. 

“Savings accounts and CDs both offer a safe place for you to put your money where it can earn interest,” says Chanelle Bessette, personal finance writer. That safety is thanks to Federal Deposit Insurance Corporation (FDIC) insurance, which protects depositors of FDIC-insured banks up to $250,000 per depositor, per insured bank, for each account ownership category. But what are the differences between CDs and savings accounts? 

“The main difference between the two is that savings accounts allow you to access your money at any time, but CDs are typically locked up for a term length, unless you want to pay a penalty,” Bessette explains.

As you compare CD vs. savings account differences, keep in mind that each account offers its own benefits. The right choice for you depends on your goals and how you plan to use your money.

CDs can offer some clear benefits, including security and predictability. Here’s how CDs work: When you open a CD, the bank or credit union offers a guaranteed return (“the rate”). For this, you agree not to withdraw your money for a certain amount of time (“the term”). 

Let’s look at some of the key questions about CDs.

A CD pays a set interest rate when you agree to leave your money with a financial institution for a certain term. CD rates can vary depending on your financial institution, the term of the CD and the interest rate environment.

If you’re looking to secure a competitive interest rate, choosing the right CD can help your money grow with more predictability. Opening a 360 CD allows you to lock in a rate that’s above the national average, which makes sure your savings grow regularly over time.

CDs aren’t made for money you may need today or this week. Typically, CD terms range from a few months to a few years. Some financial institutions offer even longer CDs.

One way to manage CD terms is to use a CD ladder savings plan, Bessette says. With a CD ladder, you open CDs with varying terms—say 12, 24, 36 and 60 months.

Once each CD matures, you can choose to roll the money into a new CD or decide how to use the funds. When it’s time to decide what happens next, the Capital One mobile app lets you change your maturity plan.

Bessette points out that one of the big benefits for savers who use CDs is security. The rate of return of CDs is fixed, and they may be insured by the FDIC for up to $250,000 per depositor, per insured bank, per deposit ownership category. (Capital One is an FDIC member.)

While there are many benefits of CDs, they do have limits. After you open a CD, you’re committed for the term. If you pull your money out of a CD before the end of the maturity date, you will likely be charged an early withdrawal penalty. That’s why Bessette thinks CDs aren’t great places to keep money that you need for daily spending. If you’re looking for accounts with more flexibility, take a look at checking accounts, which offer easier access to your money.

A CD could be the right savings option for you if:

You’re saving for a specific goal. 

A CD can help you lock in a rate to earn interest until the funds are needed for a set goal.

You’re tempted to spend.

Once you open a CD, accessing that money isn’t as easy as spending money from a savings or checking account. This extra step can actually be a good thing, Bessette says. It may help if you’re worried about using your savings before you reach your goal.

You want higher rates with very little risk.

Often, CDs pay higher interest rates than savings accounts, Bessette says. If you’d like higher rates but don’t want to take on the risks of the stock market or other investments, a CD ladder strategy may be worth considering. Keep in mind that some high interest rate savings accounts do offer rates that can compete with CD rates.

A savings account is a bank account that offers interest on deposits. Savings accounts are different from checking accounts in a few ways because savings accounts are made for money you don’t need for day-to-day expenses.

But what about CD vs. savings account differences? Let’s look at some of the key questions about savings accounts to give you a better idea. 

When you make a deposit in a savings account, the financial institution pays you interest. Keep in mind that savings account rates change over time, so they are not as predictable as CDs. That’s why it’s worth comparing rates when choosing a savings account. Capital One’s 360 Performance Savings account rate is regularly above the national average, helping you earn more over time.

Why open a savings account? There are plenty of good reasons. If you have money you don’t need for day-to-day expenses, a savings account offers the option to earn interest on your deposits. Bessette says that the big benefit of savings accounts compared to CDs is that savings accounts have no set term, so you can access your money if you need it.

Online savings accounts offered by banks may be protected by FDIC insurance. As with CDs, the money in your account is protected if something should happen to the financial institution that holds the account. As a result, savings accounts are one of the lowest-risk places to keep your money.

Savings accounts offer safety and convenience, but Bessette says they aren’t the right place for all your money. For one thing, these accounts may not come with check-writing benefits or debit cards. That means they’re probably not practical for daily spending needs. The interest rate changes over time, and you don’t know when savings account interest rates will go up or down, so they can be less predictable than a CD.

You may want to open a savings account if:

You have—or are starting—an emergency fund.

Saving enough money to create an emergency fund that covers three to six months of expenses is a key step toward financial freedom. With a savings account, you can earn interest while maintaining access to your emergency fund, Bessette says. Choosing an account with a competitive rate can help your emergency fund grow while keeping your money available when you need it.

You are saving regularly for short-term goals. 

If you want to regularly add money toward a short-term goal, a savings account can help you save money over time. For example, you could save part of your weekly paycheck for furniture you plan to buy in a few months and withdraw the funds when you’re ready. Bessette says that some banks allow you to split your savings into multiple accounts made for specific goals.  

You value flexibility. 

The rates for savings accounts are typically a little lower than those of CDs, but savings accounts give you easier access to your cash. If you value flexibility, that may make a savings account a better option for you, Bessette says. 

Saving is an important part of a healthy financial life. When it comes to deciding where to put your savings, both CDs and savings accounts offer valuable features. How do you choose?

“The main difference between a CD and a savings account is access to your funds,” Bessette says. “Both are good options for earning interest on your savings, so it comes down to which structure works best for you. You can even use both in tandem as you work to achieve your goals.”

CD vs. savings account differences, in summary:

• CDs offer a fixed interest rate and require you to leave your money untouched for a set period of time. In exchange for committing your funds for a set term, you may earn a higher rate than some savings accounts. But if you withdraw money before the CD matures, you’ll likely face an early withdrawal penalty.

• Savings accounts offer more flexibility because you can access your money when you need it. They allow you to add and withdraw funds more easily, making them a good option for emergency savings, short-term goals or money you may need in the near future.

After you’ve found the account that works for you, opening one can be quick and easy. Whether you’re looking to open a 360 Checking or 360 Performance Savings, the online application process only takes about 5 minutes to complete.