Saving for a rainy day is a financially sound decision. Ideally, you would have enough money in savings to cover your expenses for three to six months if you were to lose your job or suffer an unexpected injury that puts you out of work.
But many people have questions when it comes to where they should put their savings. They wonder whether they should put their money into a regular savings account, such as the savings shares offered by PSECU, or if they should put their money in certificates of deposit (CDs). PSECU offers these savings instruments, too, but we simply call them “certificates.”
Read on to learn about CDs and savings accounts and how they differ.
What is a CD?
A certificate of deposit is a safe and easy way to invest money. You deposit your money into a CD for a predetermined amount of time, anywhere from a few months to several years. You earn dividends on that deposit at a rate that varies based on the term of the certificate. Typically, the longer the term of a certificate, the higher the yield.
Often, the yield on a CD is higher than the yield on a traditional savings account, which is why people seek them out. However, there are restrictions on CDs. You can’t withdraw your money from a CD before the account matures without incurring a penalty. This means you can’t access the funds in the certificate for months or years without losing money.
What is a Savings Account?
Savings accounts are similar to checking accounts in that you can deposit money and remove it at your convenience. However, while checking accounts are made to be transactional – meaning that you’re regularly depositing into, withdrawing from, or making purchases with funds in the account – savings accounts are meant to be a safe place to keep money that you don’t plan to use on a daily basis. Savings accounts offer you a return, in the form of a small annual percentage yield, for holding your money.
CD vs. Savings Accounts: The Main Differences
The primary difference between a CD and a savings account is that once you make the deposit, you can’t access your funds in a CD until the term is up without losing money. If an emergency arises, you would have to pay the penalty to take that money out of the CD, whereas you can access the money in a savings account at any time.
So why choose a CD, then, when you essentially can’t access your money without incurring a penalty for up to years at a time? CDs make it worth your while because of the higher dividend rate. You typically get a better return when you put money into CDs. Sometimes this rate is significantly higher than the dividends you would earn with the money in a regular savings account and could lead to a much better return on your investment. And all you need to do to earn that additional interest is let your money sit there.
Here’s a quick summary of the differences between savings accounts and CDs:
- Higher Interest Rates for CDs. CDs tend to have higher dividend rates thanks in part to the restrictions. CDs represent a low-risk investment. Financial institutions know the money will be secure for the term of the certificate, which means less volatility. The financial institution will reward you for this.
- No Way to Access Money for CDs. With a savings account, you have access to your money as long as you haven’t exceeded any of the specific requirements of your financial institution. You can take out money and put money back in at your discretion. With a CD, you can’t access your money until the term is up, unless you choose to pay a penalty.
- Minimum Deposits for CDs. Most CDs have a minimum deposit. At PSECU, for instance, the minimum deposit on a certificate is $500. Some financial institutions have minimum balance requirements for savings accounts, but PSECU doesn’t require anything above the $5 initial deposit needed to open your account. You can leave the balance of a savings account up to your own discretion based on your financial needs.
Should I Get a CD or a Savings Account?
We hear this question a lot, and the answer varies based on your particular circumstances. If you have a lump sum of money that you won’t need to access for several months or years, then a CD may be the right answer for you.
However, if you want your money to be accessible in case of an emergency, a savings account may better meet your needs. You can draw on the money right away to pay bills or other expenses that come up.
Ready to start saving with a CD or savings account? Contact us today to get started. And remember, you can always find more money management information on our WalletWorks page.