Thanks to a higher federal funds rate (due to the efforts of the Federal Reserve), now is a really great time to have cash savings in the bank. If you have extra money on hand and need a new and virtually risk-free place to keep it, you’ve got options: high-yield savings accounts and certificates of deposit (CDs).
You might assume that a CD is a better choice — after all, according to the FDIC, the average APY on a 12-month CD (which is the highest of all the rates the Fed keeps track of) is currently 1.76%, while the average savings account APY is just 0.45%. But you should consider more factors than just APYs when picking a deposit account. Let’s discuss the advantages a savings account has over a CD.
1. You likely won’t need a minimum deposit
Many of the best CD rates are available to you only with a minimum deposit amount — in most cases between $500 and $2,500. Conversely, you can open many of the best high-yield savings accounts with $0.
This makes savings accounts a lot more accessible, and since the rates on the best ones available are comparable to the rates you’d get with a CD, it makes a lot more sense to opt for a savings account if you have only a small amount of money to start with.
2. You can keep adding to your balance
Your savings account balance might start out small, but you’ll have the flexibility to add to it whenever you want. With a CD, on the other hand, you’re locking your money in place for a period of time. In addition to being unable to withdraw any of it early without penalties (more on that below), you also can’t add more money during the term.
If you open a savings account linked to an existing checking account, funding it couldn’t be easier — you can transfer money from checking to savings in a matter of seconds if it’s only moving between accounts at the same bank. Even having a savings account at a different bank isn’t a hurdle to saving. I have my main checking and main savings at different banks, and money transfers quickly in one direction (checking to savings) and slowly going back the other way — this slight inconvenience actually gives me more incentive to not tap my savings.
3. You have easier access
Going back to my earlier point, part of the deal with a CD is that you must agree to leave your money alone for the duration of the term, lest you lose some of the interest you’ve accrued. Penalties vary, and you could lose a few months’ worth or more — for example, one of the best CD issuers charges an entire year’s worth of interest as a penalty for breaking into a CD term of 12 months or fewer early.
Keep in mind that a savings account will have some limits on accessing your money. Many banks still have a cap of six convenient withdrawals per month, per Regulation D (this rule was suspended as a result of COVID-19, but it’s up to banks to change their own rules — or not). Plus, you’re not likely to get a debit or ATM card to access your savings. This makes a certain amount of sense, as ideally you’re leaving money in the account to grow with interest until you need it.
And “need” is the key word here. A CD is a terrible place for important cash like your emergency fund. When it’s an emergency, you need that money sooner rather than later. So even if you opt to put some savings into a CD, always keep your emergency fund in an unrestricted account, like a savings account or a money market account.
If you’ve got cash saved, you’re in an excellent position. Just be sure to find the right home for that money. For all the reasons above, opting for a savings account over a CD could be your best bet.
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