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How to decide if you should keep your money in CDs vs. Savings Accounts?

Chris Gottschalk

Chris Gottschalk About The Author

May 9, 2023 4:45:00 AM

Almost everyone uses a savings account when they first start saving money. After you’ve been putting aside money for a few months, though, another option becomes available—certificates of deposit, better known as CDs.

A CD will give you a significantly better interest rate than a savings account. However, you won’t be able to access your money while it’s in the CD account, at least not without paying a penalty. Once the CD reaches its maturity date though, you’ll have access to the amount you deposited, as well as the interest you’ve earned.

This, of course, leads to an important question:

What are the benefits of keeping your money in CDs vs. savings accounts?Keep money in a CD or savings 

The Benefits of Keeping Your Money in a Savings Account

Putting your money in a savings account has some huge benefits. First, there’s usually not a big minimum deposit requirement. At First Alliance Credit Union, for instance, you only need $5 to open an account.

In addition, a savings account is versatile. You can deposit money in it at any time, either directly or from your checking account. You can also withdraw money from your savings account at any time, and you can use it to save up for anything.

Most importantly, though, the money in your savings account is readily available for you during regular business hours—or at any time of day if you access your account through one of our Advisor Supported Kiosks.

The Benefits of Keeping Your Money in a Certificate of Deposit

When you put your money in a CD, on the other hand, you get a very different set of benefits than you get from a savings account. The biggest difference? A higher interest rate.

The interest rate you’ll get from a CD is exponentially higher than the interest rate you’ll get from a savings account. Even better, the longer the term of your CD, the higher your interest rate will be. If you're willing to keep your money in a multi-year CD, you'll be able to get the best rates.

A CD also has a more stable interest rate than a savings account. While a savings account’s interest will rise or fall depending on whether the fed raises or lowers interest rates, a CDs interest rate will stay the same until the CD matures.

Finally, a CD removes any temptation to spend money. Once you open a CD, you can’t access the money in it until the CD matures, at least not without having to pay a penalty. This is an excellent way to ensure you won’t be tempted to spend that money.                                

CDs vs savings account benefits                                                                                                                                                                                                             

When Should you Use a CD or a Savings Account?

So which account is best for you? It depends entirely on your priorities.

We mentioned previously that almost everyone uses a savings account when they first start setting aside money, but a savings account is also ideal if you’ll want easy access to the money you have saved. For example, you might want to keep your emergency fund in a savings account so you can use that money if you have an emergency.

If you’re trying to save money for multiple goals at the same time, you’ll also want to keep your money in a savings account. For instance, if you’ve gotten your first career job and you want to start building up your emergency fund but you also want to save up for a newer car, you’ll want to put the money you’re saving for both of them in a savings account.

On the other hand, you'll want to think about opening a CD account if you’re saving for a specific financial goal, especially if you’ve got a fixed date in mind. These can include:

  • Vacations
  • Remodeling your home
  • Holiday shopping
  • Buying a car
  • Making a down payment on a home

You can put your money in a CD and be able to calculate how much you’ll have when the CD matures. As an added bonus, you won’t be tempted to spend that money on anything not related to the goal you’ve set for yourself.

Having said that, there’s no rule that says you can only keep your money in a CD or a savings account. You can, and quite frankly should, use both to boost your finances and achieve your goals. You can keep your emergency fund in a savings account, for instance, and open a CD with the money you’re saving for one or more of your goals.

Which one is better for short-term vs long-term savings goals, CDs or savings accounts?

Savings accounts are better for short-term savings goals, as they offer easy access to funds. CDs, on the other hand, are ideal for long-term savings goals, as they typically offer higher interest rates but require locking your money away for a fixed period of time.

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Open CDs and Savings Accounts at First Alliance Credit Union

When you’re trying to decide whether to put your money in a CD or a traditional savings account, you’ll want to think about how you want to use the money you’ve saved. A savings account is best for people just starting to save and people putting aside money in case of an emergency, while CDs are a good idea for people saving for a financial goal. However, you can and should use both types of accounts to achieve your financial goals.

If you’d like to experience the benefits of both a CD and a savings account, become a member of First Alliance Credit Union and talk with a member advisor. They’ll help you through the process of becoming a member and answer any questions you might have about either account. You can even explore other types of savings accounts, such as a money market account or a WINcentive savings account.

We do our best to provide helpful information but we cannot guarantee the accuracy or completeness of the information presented in the article, under no circumstance does the information provided constitute legal advice. You are responsible for independently verifying the information if you intend to use it in any way. Additionally, the content is not intended to be reflective of First Alliance Credit Union’s products or services, for accurate and complete details about our product and service information you must speak to an advisor at First Alliance Credit Union.