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May Q&A: Available now
This month, the Making Sense team answers client questions related to trade policy developments and their impacts on key economic issues.
When should you choose a certificate of deposit, known as a CD, versus a savings account? It's a common question for anyone who wants to save money, but the correct choice ultimately depends on why you're saving and when you want to be able to tap into your cash. Here's a closer look at what you can expect from a CD versus a savings account to help you develop a financial strategy that's tailored to your lifestyle.
A savings account allows you to deposit your funds using a variety of methods, which may include direct contributions from your paycheck, transferring funds from another account, or making a deposit using the branch, an ATM or a mobile app.
Most savings accounts allow you to withdraw your money when you want without penalty. However, some may charge service fees or require you to maintain a minimum balance in order to avoid fees. Understanding the terms of any account before you open can help prevent you from unintentionally losing money you could otherwise save.
A certificate of deposit, or CD, is a type of deposit product that offers a specific interest rate for holding money until a certain date when the CD has matured. The saver can then withdraw the funds originally deposited in the CD, plus the interest earned, without penalty. If the saver needs to access the funds in the CD before the maturity date, an early withdrawal penalty could apply.
The interest rate that a CD pays depends on a number of factors. This includes the financial institution issuing the CD, the amount of money deposited in it and the amount of time the saver agrees to keep the money in it (also known as its term). Generally, CDs with terms that span several years will pay more than those with terms that last less than one year.
The term high-yield indicates the savings account pays a competitive interest rate on funds deposited. In today's historically low interest rate environment, for example, the average savings account interest rate in the United States is about 0.05%. A high-yield savings account, on the other hand, might offer an interest rate of about 1%. Savers with a high-yield savings account will likely be able to withdraw funds anytime, without penalty, but the interest rate is subject to change at any time. Though savers with money in a CD may not be able to access their money penalty-free at any time, their CD may include a fixed rate that doesn't change until the CD matures.
While there isn't a significant difference in today's interest rate environment between some CDs and high-yield savings accounts interest rates, that's not always the case. In mid-2006, for example, some shorter-term CDs paid more than 5% interest compared to high-yield savings accounts, which generally paid about 4% interest.
Now that you know the difference between a CD and a savings account, consider how both products might help support your different financial goals.
CDs and savings accounts have similarities and differences, and both can be used jointly as part of a larger strategy. Work with your banker to develop a portfolio of savings products that support your short- and long-term financial goals.
This material is for informational purposes only and is not intended to be an offer, specific investment strategy, recommendation or solicitation to purchase or sell any security or insurance product, and should not be construed as legal, tax or accounting advice. Please consult with your legal or tax advisor regarding the particular facts and circumstances of your situation prior to making any financial decision. While we believe that the information presented is from reliable sources, we do not represent, warrant or guarantee that it is accurate or complete.
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