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Savings vs. CD Accounts
When it comes to setting aside money for the future, consumers have many options. One common decision is choosing between opening a savings account or a CD account. Each one has its own benefits. Many consumers may ask: "What's the difference, and which one is better for me?" In this article, we'll examine the question of savings vs CD accounts, what each type offers and which might be the better choice for you.
What is a savings account?
There are quite a few varieties of savings accounts — but at their core, they generally share the same features. They're basic bank accounts where you deposit money and it earns interest. Account holders can withdraw funds when they like. However, some banks limit the overall number of transactions per month. Exceed that number and a monthly fee could be charged. There might also be a fee for each extra transaction over the limit. If transaction limits continue to be exceeded, some banks may even convert the account to a checking account.
What is a CD account?
A certificate of deposit, or CD as they're commonly called, is the next type of savings. They tend to pay higher interest rates than savings accounts. But that comes in exchange for leaving money deposited for an set period of time, called "the term." The term could be as short as 3 months or even stretch out for several years. Withdrawing money before the account matures often results in early withdrawal penalties. The penalty usually means forfeiting some or all of the interest the account has earned.
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Low minimum balance requirements allow you to get started saving money easier
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Monthly maintenance fees are often waived if larger balances are maintained or other requirements are met
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Like other deposit accounts at FDIC institutions, savings accounts are insured by the Federal Reserve for up to $250,000 per depositor, per insured bank, for each account ownership category
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No early withdrawal fees — you can withdraw money when you need it
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You can add money to a savings account at any time, as long as transaction limits aren't exceeded
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Standard savings accounts tend to offer a fairly low interest rate, but higher balances may qualify for a high-yield savings account
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In exchange for a loss of cash liquidity—by agreeing to leave funds deposited for a set amount of time—CD interest rates tend to be higher than savings account rates
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CDs may be considered somewhat safer than stocks, bonds, and other market-based investments that are subject to fluctuations
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Some CDs require only a low minimum balance to get started saving
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Even though money is locked in for set terms, there are options for early withdrawals, though you might in some cases incur a loss of interest earned
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Since taking out funds early results in penalties, it could lower the temptation of unnecessary spending. At the same time, you might consider keeping a separate emergency fund for unexpected expenses
What to consider when choosing an account
Let's compare the two accounts and see what you might consider before jumping in on one or the other. Factors include:
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Interest rates
Savings account interest rates are typically lower than the rates that CDs offer. Because of a CD's defined term, banks typically pay more interest than for savings accounts. Some accounts have even higher returns if larger balances—often $10,000 or more—are deposited. Plus, some institutions offer a "bump rate" on their CDs. That's when having another account at the same bank results in a bump, or increase, in the interest rate -
Withdrawal flexibility
For pure flexibility, a savings account wins every time. Although there might be limits to the number of transactions per month, for many people that won't be an issue. As to CDs, they have early withdrawal penalties, discouraging removal of funds before maturity. But that could be seen as useful, as it helps prevent unnecessary dipping into the CD's principal -
Fees
If you work through a broker to obtain a CD, the broker may charge a brokerage fee. Otherwise, once a CD is opened the only extra charge that's likely would be for early withdrawal. Savings accounts may include ATM fees for withdrawals at those machines, maintenance fees if the account balance falls below a certain level, and excess transaction fees
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Minimum deposits and balances
Both CDs and savings accounts are similar in this area. Many savings accounts have no minimum deposit or balance requirements. However, if the account stays below a certain balance, there might be a monthly fee charged. For CDs, there's almost always some minimum opening deposit requirement. That might be as low as $250 to start — or it could be $100,000 or more for high-end CDs -
Other factors
Some CDs offer free auto-renewals. When the term matures on the CD, the principal and earned interest are automatically reinvested into a new CD. Of course, you could stop that from happening if you want to withdraw your money. There's usually a grace period, perhaps 10 days from the maturity date, when you can make withdrawals without penalty. CDs and savings accounts are insured by the Federal Reserve system if they're an FDIC bank. Both are equally secure. But CDs issued elsewhere, such as offshore CDs, brokerage CDs, and similar private instruments, aren't insured. These types of CDs often advertise much higher returns to entice investors. However, they may be less secure than uninsured CDs
Accounts offered at TD
TD Bank offers a wide range of personal finance options that consumers can take advantage of. Let's look at three of them:
TD Simple Savings
An everyday savings account, TD Simple Savings is great for building your savings or for a young saver in the family. Keeping a $300 minimum balance will waive the $5 monthly maintenance fee. And if you're a full-time student, or under 18/over 62, maintenance fees are waived. There's no minimum deposit to open an account, and no fees for withdrawals at TD Bank ATMs. A TD Simple Savings account can be a good way to build toward your savings goals.
TD Signature Savings
For investors investing more money and looking to earn greater interest, TD Signature Savings can be a great choice. Tiered interest rates grow along with your account balance. And interest gets a bump if you link an eligible TD checking, mortgage, home equity line or credit card. Monthly maintenance fees can be waived three different ways. Other perks include free incoming wire transfers, bank checks and money orders. Plus, you'll pay no ATM fees anywhere when you carry a $2,500 minimum daily balance.
TD Choice Promotional CDs1
Consumers looking for a versatile CD option might consider TD Choice Promotional CDs. They offer a variety of terms with competitive interest rates that increase along with your balance. The CDs include TD's bump rate feature2, automatic renewal options, and terms from 3 months to 5 years. There's a comparatively low $250 minimum opening deposit to get started, and no monthly maintenance fees. It can be a great way to get started with a CD.