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Banking 101: CDs vs. Savings Accounts - Which Should I Choose?

Written by Jacqueline DeMarco | Published on 5/23/2019

Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.

We all need to save for a rainy day. Having money set aside not only makes you feel more secure, but it also helps you reach your goals and prepares you for the inevitable financial bumps in the road of life.

If you’re reading this article, you probably already made the decision to start saving money, but you might not be sure which type of savings vehicle is right for you. Some of the most common types you may be considering are certificates of deposit (CD), savings accounts and money market accounts.

Each of these deposit accounts have their own specific uses, strengths and weaknesses. Read on to learn the differences between a CD vs. savings accounts.

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CD vs. savings accounts: What’s the difference?

  • Certificate of deposit: You agree to deposit your money in a CD for an agreed-upon amount of time. By consenting to keep your money tied up in a CD for a set term, a bank or credit union guarantees you will receive a fixed amount of interest. When the term is over, you get back the original amount invested plus earned interest.
  • Savings account: Banks grant you interest on money deposited in a savings account, but you are limited to a relatively small number of fee-free withdrawals per month. Unlike a checking account, which holds money for everyday needs but earns little to no interest, a savings account is generally used to salt away money for future needs and earn an attractive rate of interest.
  • Money market accounts: A money market account is a form of savings account that can offer higher interest rates, and often offers easier access to your money, via paper checks and debit cards.

Why are there strict terms that dictate how long you must keep your money in a CD? It’s because the banks need to benefit from this investment, too, according to Amy McGraw, vice president of marketing and chief experience officer at Tropical Financial Credit Union in Miramar, Fla.

“With CDs, the longer you commit to keep it in that account, the higher the interest rate. This gives the financial institution assurance the money can be used for loans,” said McGraw.

Note that all three types of accounts are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Share Insurance Fund (NCUA). The FDIC guarantees up to $250,000 deposited in a bank account, and the NCUA insures credit union accounts up to $250,000.

CD vs. savings accounts: Accessibility

One of the primary differences between a CD and a savings account is accessibility. With savings accounts and money market accounts, you’re limited to six withdrawals or transfers each month. However, you can make as many deposits as you want without fees or limitations.

With a CD, your money is locked into investment for the agreed upon amount of time. And if you make an early withdrawal, you may be subject to penalties that will reduce how much interest you earn on your investment. Generally you can’t add more money to a CD once you’ve agreed to the terms.

When considering a CD, the big question is how long you can afford to keep your money locked up. “The definition of ‘afford to’ is a willingness or the ability to put money away for a longer period of time where you know you can’t get to it unless you want to pay a penalty,” noted Philip Salis, SVP of member engagement and chief banking officer at Alliant Credit Union in Chicago.

Of course, accessibility comes at a cost. Savings accounts usually have a lower interest rate than CDs. One notable disadvantage to choosing a savings account over a CD is that savings account rates are subject to change. A CD generally has a fixed rate, and therefore more predictable returns (there are variable-rate CD procuts that have changeable interest rates). Some variable-rate CDs are structured so interest rates can increase or decrease over time according to a pre-planned schedule. Other variable-rate CDs may pay interest rates that correspond to the performance of a specified market index.

According to DepositAccounts founder Ken Tumin, yield should be a big factor for people trying to decide whether they want a CD vs. savings account. Tumin posed two questions to consider: “Is higher yield of a CD worth reducing the accessibility? Is that extra interest that you’re earning worth it?”

CDs vs. money market accounts

If you’re debating between a money market account and a CD, you’ll want to take a look at the interest rates you are being offered. Typically, CDs have much higher interest rates than a money market account. Tumin notes there is a benefit to having less access, “the trade-off is, you give up the access flexibility for a higher yield.”

However, if you need access to savings more immediately, you may want to consider a money market account. Because that money will still grow, even if it is at a lower interest rate, while remaining accessible to you. If you want to access your CD funds early, you will face penalty fees that can usually require you to forfeit three to six months’ worth of interest.

Money market accounts vs. savings accounts

Whether you choose to utilize a savings account or a money market account, you can earn interest on the money you deposit in the account. Interest rates on both account types can fluctuate, but there are times where money market and savings accounts can have similar interest rates.

Salis advises researching current money market account rates more carefully. “The rules surrounding savings accounts are typically more generic. But when it comes to money markets, I think you are going to find more variability,” he said. Generally, money markets often offer higher interest rates than savings accounts because money market accounts may require larger deposit amounts.

Note that most money market accounts and savings accounts have a minimum deposit amount. “I think one important thing that a lot of people don’t realize is that the money market account is very similar to the savings account. And sometimes at some banks, they can be essentially the same thing with the same features,” said Tumin.

There are limitations with either type of account regarding your access to withdrawing or transferring funds. Both allow up to six transactions every month. You may be subject to fees or risk your account being terminated if you exceed your monthly limit.

Before choosing a money market account or a savings account, consider the following factors:

  • Opening deposit amount. Money market accounts generally require larger opening deposits, and can offer higher interest rates. If you have less money available to deposit, consider a savings account. If you shop around you can find savings accounts with low or even no minimum deposit requirements.
  • You want to write checks. If you need the ability to write a check, you may want to choose a money market account. However, regulations still limit the amount of checks you can write per month.

Looking at the pros and cons

The pros and cons of each type of deposit account are pretty clear. It all comes down to how much interest you want and how much liquidity you need in your savings vehicle.

Pros Cons
Certificates of deposit
  • You are guaranteed an agreed amount of interest at a CD’s maturity date
  • Interest rates are usually fixed and predictable
  • Most CDs are subject to early withdrawal penalties
  • Once opened, you cannot add more money to a CD
Savings accounts
  • You can make unlimited deposits, and are allowed a fixed number of withdrawals a month
  • Interest rates on savings accounts rates can change at any time
Money market account
  • You can write checks and make ATM withdrawals
  • Generally higher opening deposits

CD vs. Savings Account: Which should you choose?

McGraw believes the key to making a decision over which type of savings vehicle to choose is personal, “What’s best for the consumer all depends on what’s important to them … Either way, consumers should do their homework and fully understand the pros and cons of each.”

For extra help making this decision, Tumin recommends checking out this tool from DepositAccounts. It can help you try to maximize interest on your savings while factoring in flexibility and the effort required on your end.


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