Emergencies, retirement, vacation, higher education – these are among the most popular reasons for saving. No matter what your reason is, are you saving your money the right way?
There is a wrong way to stash your cash. The worst way would be to not do it at all, like almost 60% of America.
Another big mistake is to save without making your money work for you. Your hard-earned cash should be able to earn on its own.
In most countries you have different options if you want to keep some cash at hand and make an interest on it. This is different from investing in assets carrying risk. The interest accounts will have different names in different countries, but the concepts remain the same.
I’m going to pit two popular methods against each other – CD vs savings account – to see which one is best. The ultimate winner will be you because you’ll have the best way to save your money.
What is a savings account?
Your parents might have opened a savings account for you when you were a kid. They’re the most basic accounts you can open with your bank.
Here’s how it works: you deposit your money in a bank or credit union. They hold it for you and it earns interest. In today’s low-interest environment, you risk having a negative interest or interest that doesn’t make up for inflation.
Pros and cons of a savings account
Why should you choose a savings account?
- Withdraw your money at any time
- Access your money from ATMs
- Transfer funds electronically
- Usually low-interest rates (perhaps negative)
- Typically limited to an amount of withdrawals per month
Savings accounts are great if you know you’ll need access to quick cash. Plus, with ATMs (some even global), you can always access your money at a moment’s notice. Savings accounts are mostly relevant if you don’t know whether you will need the money soon again.
What is a CD?
A CD, or certificate of deposit, is almost like a savings account. The difference is your deposit has to “mature”.
What that means is your money gets locked up until a certain amount of time has passed. During this time, your money is earning interest.
Pros and cons of a CD
Using a CD is a creative way to save money and earn interest on it. You want your money to work even harder than in a traditional savings account.
Here’s why a CD might be your best option:
- Earn more interest than a typical savings account
- Lock in a high interest rate and it won’t change while you have your CD
- No fees incurred during the time you have your CD
- No immediate access to your funds
- Steep penalties if you withdraw your cash before the account is mature
- Need to meet a minimum amount to use one
While your money isn’t as liquid in a CD, it works much harder. If you know you won’t need access to your money any time soon, a CD might be your best bet.
CD vs savings account: Which is best?
I’ve laid out arguments for both savings options. You’re the one who has to make the ultimate decision.
In the battle of CDs against savings accounts, you need to take a look at both your short term and long term goals. That will be the most important deciding factor. Do you need the money now or can you wait until later to get a higher return?
Your turn: Have you ever used a CD instead of a savings account?