What is a CD account vs savings account?
A CD is a type of savings account that can pay a higher interest rate than a high-yield savings account in exchange for removing access to your funds during the CD term. Standard terms range from three months to five years, but can be as short as one month and as long as 10 years.
CD accounts may offer better interest rates than savings accounts. Longer terms will usually also have more favorable rates.
Compared to savings accounts or money market accounts, CDs potentially can offer higher interest rates on deposits. That's because you agree to keep your money in the CD for a set time period. The interest rate and APY you earn depends on the bank, the CD term and the current interest rate environment.
Pros | Cons |
---|---|
Higher APY than other savings vehicles | Returns not as high as investing in stocks, bonds, or index funds |
Certainty with fixed rates over the term, despite economic activity | APY is locked in and doesn't account for inflation |
The definition of certificate of deposit is an account that allows you to save money typically at a fixed interest rate for a fixed amount of time—say, 6 months, 1 year or 5 years.
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 rates may not be high enough to keep pace with inflation when consumer prices rise. Investing money in the stock market could generate much higher returns than CDs. CDs offer less liquidity than savings accounts, money market accounts, or checking accounts.
Top Nationwide Rate (APY) | Balance at Maturity | |
---|---|---|
1 year | 6.18% | $ 10,618 |
18 months | 5.80% | $ 10,887 |
2 year | 5.60% | $ 11,151 |
3 year | 5.50% | $ 11,742 |
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
With a traditional CD, you typically make a one-time opening deposit and leave it in the account until the end of the term. You can't continually add money to this type of CD. However, you can opt to open an add-on CD, which allows you to make additional deposits throughout the CD's lifetime.
Should I switch from savings to a CD?
Savings accounts give you more flexibility to make withdrawals, but CDs offer fixed interest rates that can boost some savings if you're able to leave your money alone for a set time. The best place to deposit your cash generally depends on how long you're willing to leave it in your account.
As part of a portfolio that includes cash, CDs can provide stability and security. However, CDs are unlikely to provide you with the returns you need to build wealth for the future or live off the interest — unless you already have a large amount of money and ladder your CDs to avoid penalties.
Why it's probably time to buy a CD. Rates will remain high for a bit longer, but it's unclear how long. The Fed has indicated that there will three rate cuts in 2024, which means it's unlikely that CD rates will continue to climb . Waiting to open a CD could mean missing out on some stellar rates.
Depending on the bank, a $5,000 CD deposit will make around $25 to $275 in interest after one year. Online banks and credit unions pay appealing CD rates, and you can earn more interest than at big brick-and-mortar banks. When choosing a CD, consider other factors beyond the interest rate of an account.
Even if an individual owner rolls over a CD at its maturity into a new CD, the owner must pay income tax on the income the CD owner is entitled to receive at that time.
That all said, here's how much a $1,000 CD will make in a year, based on four possible interest rate scenarios: At 6.00%: $60 (for a total of $1,060 total after one year) At 5.75%: $57.50 (for a total of $1,057.50 total after one year)
A one-year CD typically offers a higher interest rate than shorter-term CDs, such as three-month CDs and six-month CDs. Offers higher interest rates than traditional savings accounts.
Once the CD matures, you may have a grace period, established by the bank, to decide whether to renew the CD or withdraw the funds. The bank will pay interest, if any, once the CD matures in accordance with your account agreement and bank policy during the grace period.
Both money markets and CDs are low-risk savings options, as they both carry FDIC insurance. But CDs also minimize other types of risk, like sudden drops in interest rates, by offering fixed terms .
Interest rates for short-term CDs are very high right now – but they might start to go down soon. Putting $10,000 into a short-term CD right offers solid – if perhaps not spectacular – returns for virtually no risk. If you have money you don't think you'll need to access imminently, a short-term CD is a great choice.
Is a 6 month CD worth it?
Plus, you can often earn more in a six-month CD than you would in a high-yield savings account. Six-month CDs are worth it if you know you need to make a major purchase within the year and want to earn as much interest as possible on your money without putting it at risk.
A 3-month CD is great for money you won't need for the near term. But it doesn't offer the same flexibility as a savings account, nor does it guarantee a high rate for a long period of time. Most 3-month CDs have early withdrawal penalties to discourage you from pulling out too soon.
With such high interest rates, the earnings on CDs are impressive. You'll earn $850.50 for a total of $15,850.50 after one year when you open a $15,000 1-year CD with Popular Direct when calculating the returns at current rates.
- Elements Financial – 5.35% APY.
- First Internet Bank – 5.31% APY.
- Sun East Federal Credit Union – 5.30% APY.
- Northpointe Bank – 5.30% APY.
- Quontic Bank – 5.30% APY.
- Colorado Federal Savings Bank – 5.30% APY.
- Home Savings Bank – 5.30% APY.
- My eBanc – 5.30% APY.
Account Name | APY (Annual Percentage Yield) Accurate as of 3/21/2024 | Minimum Account Opening Balance |
---|---|---|
Alliant 1 Year CD | 5.40% | $1,000 |
Western Alliance Bank 3 Month CD | 5.36% | $1 |
Barclays 6 Month Online CD | 5.30% | $0 |
CIT Bank No Penalty 11-Month CD | 4.90% | $1,000 |
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