cd or savings accountIf you’re looking for ways to save or invest your money, you might be wondering what’s the best way to go about doing so. While opening a savings account is probably the most well-known and popular way to start saving, there are also other options to consider, such as a certificate of deposits (also known as a CD). Whether you’re new to the world of savings or you’re looking for the best way to start an emergency fund or save for that vacation you’ve been meaning to take, we’ve got the guide on everything you need to know about savings accounts and CDs. Keep reading to see which is the best option for you.

What is a savings account?

A savings account is similar to a checking account, which can be opened with financial institutions such as a big bank, a credit union or an online bank, that earns interest over time. There’s generally a minimum opening deposit required to open a savings account, which can range from about $25 to $500, depending on the bank and type of savings account you’re looking to open. Note that some online banks don’t require minimum deposits. The amount of interest the money in your savings account earns depends on its APY (annual percentage yield). It’s important to note that savings accounts have variable interest, which means your rate can change over time, depending on the state of the economy. Sometimes, this means that the funds in your savings account will earn more interest, while other times, it can earn less interest. Something to also note is that you’ll usually be required to maintain a certain balance in your account or meet other requirements (e.g., set up a direct deposit or automatic transfer) to avoid the fees. This is especially true for brick-and-mortar banks, but rarely holds true to online banks. Finally, although you can access and withdraw money from your savings account at any time, federal regulations limit you to six withdrawals per month.

What is a CD?

While a CD is not technically a savings account, it is somewhat similar in the sense that you’re putting money in the bank for safekeeping and for it to earn interest over time. That said, CDs operate very differently than savings accounts. To start, the minimum deposit required to open a CD is much higher than what’s required for a savings account — usually starting in the $1,000 range — and the deposits you make into a CD are time deposits. This means that your funds must be held in the account for a certain length of time before you can withdraw them. This time period is referred to as the maturity date and can vary from a few months to a few years, depending on the terms associated with your CD. Also unlike savings account, CDs feature a fixed interest rate, meaning your APY will remains the same throughout the entirety of your account (until you reach maturity). Although your money is earning interest during the time it’s in the CD account, you cannot access your money as freely as you can with a savings account. If you do choose to make a withdrawal from your CD before the maturity date, you will be charged a penalty fee, which usually totals to a month or two of interest, depending on the bank.

Which is best for me?

There are pros and cons to both types of accounts. Where a savings account offers more flexibility and easy access to your money, a CD usually offers higher interest rates, which means your money will grow over time but you won’t be able to withdraw your money for an extended period of time (unless you want to pay a fee). In addition, CDs don’t typically charge the monthly service fees that some savings accounts do. So what it really boils down to is how much you want to put down to open an account, and whether you want to access your money immediately, or if you’re okay with your money sitting in an account for some time.

Once you determine the best type of account for you, you’ll want to make sure you select the right bank for your account needs. While it may be tempting to go down to the local big bank or credit union, you may want to look into an online bank first. These banks offer higher interest rates than you’d get with a traditional bank and most don’t charge the service fees or require you to maintain a certain balance on a savings account. Similarly, they offer a plethora of account types, including savings and CDs. You can learn more about online banks and determine if they’re the right fit for you by visiting our online savings account reviews.