Comparison of CD Rates vs. Savings Accounts

If you’re starting to build wealth but want to understand what more you can do to protect your finances and see growth, consider a Certificate of Deposit (CD) account. 

Let’s look at the basics of CD accounts, the pros, and cons, the difference between CD accounts and savings accounts, and lastly, how to get in touch with an experienced banker. 

By the time you finish reading, you’ll feel ready to take the next step in investing your wealth. 

What is a CD account? 

A CD account (Certificate of Deposit account) is when you deposit a set amount of money into an account for a duration of time.  

Credit unions, banks, and private lenders can offer a CD account. CD accounts allow for different terms and higher, fixed interest rates.  

They’re best used for saving over a longer time but can also be offered for a shorter time, like three months to a year, depending on your financial institution. 

Because the interest rates are higher than savings accounts, you’re guaranteed a higher return on your money when invested at full maturity. 

CD accounts have an APY (Annual Percentage Yield), which is your yearly earned interest. Once your account is mature, you can access the funds in your CD account plus the interest accrued. 

There are different types of CD accounts to choose from, depending on your financial institution and financial goals. 

It’s best to speak with a banking professional to discuss the different types of accounts they offer, their withdrawal penalties, and if they have any specific requirements, such as a minimum starting deposit. 

The pros and cons of a CD account 

Before you open a CD account, you should understand the good and the not-so-good of what they have to offer. 

With CD accounts, you have different terms and types of accounts to choose from. You could choose to open a CD account for five months or five years.  

There’s also no restriction on how many accounts you can open, so you could open multiple six-month CD accounts or six-month and three-year accounts. 

The downside is that you cannot access those funds until the CD account reaches maturity, or the term is completed. If you need to make an early withdrawal, then you can generally expect a fee or penalty. 

With CD accounts, the interest rates work in your favor because on average, they’re higher than savings accounts. This is especially true in times of inflation, and higher interest rates. You’ll receive a higher return with higher rates. 

Alternatively, when rates are low, you’re not going to yield as much of a return.  

If you fear rates will soar after you lock into a CD account with low rates, you can always reinvest your CD account once it reaches maturity into another account with better rates. 

One ‘workaround’ for lower rates is setting up an account with longer terms. Longer account terms typically yield higher interest rates or returns.  

CD laddering is another way to combat low-interest rates.  

In times of lower interest rates, you can open shorter term lengths so that you can take advantage of the APY and reinvest your CD account once rates are higher again. 

Additionally, since CD accounts offer a fixed interest rate and APY, you know exactly how much you’ll receive upon term completion, no matter how much the market rates have changed. 

Do I need a CD account? 

A CD account is a safe and savvy way to make your money work for you, both long and short-term. 

Some of the ways you can use a CD account include:  

• Buying a car 
• Purchasing a home 
• Educational expenses 
• Saving for a wedding 
• Saving for a vacation 

While you can use CD accounts for short-term goals, and this may even be ideal if you use the CD laddering technique, the main point of CD accounts is to let your account sit and grow.  

You can access your CD account once it’s fully mature, but they’re not like a checking or savings account where you make frequent withdrawals. 

CD accounts vs savings accounts 

CD and savings accounts help build your wealth; however, how they build it varies greatly. 

With CD accounts, you’re saving money over a fixed period. You decide how long you want to set up the account, whereas savings accounts won’t close until you close them yourself. 

Savings accounts usually offer lower interest rates, so you won’t see as much of a return on your investments. The return may be barely noticeable for some individuals due to the monthly maintenance fee. 

As we’ve discussed, one of the best benefits of CD accounts is that they offer higher and fixed interest rates, so you can see your money grow. Lenders can offer higher rates with a CD account because the funds are ‘locked’ in an account.  

CD accounts aren’t ideal for an emergency fund due to the withdrawal penalties, but you can still use them as such. In comparison, some savings accounts allow you to make a set amount of monthly withdrawals. 

How CD accounts work 

• You open a CD account with a financial institution 

• The financial institution will lend your money to others during your fixed period and charge those borrowers a high-interest rate 

• The financial institution will share the profits from the interest rate with you. The amount is based on your CD rate 

CD accounts are a guaranteed way to meet your financial goals.  

If you know your term length and financial goals, you can use a CD calculator to see how much you’ll earn in interest based on your APY and term length.  

But you don’t have to put all your eggs into one basket – or account. You can take advantage of both types of accounts at the same time. 

Simple and easy banking with The Federal Savings Bank 

If you’re ready to take the next step and learn more about CD accounts—contact The Federal Savings Bank. 

We can serve your personal needs and guide you through your path of financial empowerment.  

Check out our competitive CD rates and learn how to increase your wealth.