21 Dec When to Use a CD Over a Savings Account
A Certificate of Deposit (CD) can provide you with a secure savings tool giving a solid boost to your savings. In addition, CDs are well known for having a fixed rate of return, making them very appealing. No matter the term you choose, whether it’s six months or five years, you know exactly what interest rate you will earn on your savings.
It’s better to look into CDs for medium-term goals. For example, CDs are better when you know that you won’t need the funds for an extended period, such as six or nine months until you can take that vacation or make that down payment on your next car.
A CD vs savings account is both safe investments for saving your money. In this article, we’ll help you decide which option is best for your needs as a veteran
What Is a Certificate of Deposit?
A certificate of deposit, commonly known as a CD, is a type of time deposit account offered by most financial institutions, just like a bank account. To open a CD account, you must agree to have your funds locked by the bank for a specified period. The bank then guarantees you a specific rate of return on your funds. It is common for CDs to require a minimum deposit. However, the amount varies widely from institution to institution.
There is a wide variety of CD terms, ranging from a few months to several years. However, you will have to pay a penalty fee if you withdraw your money before the CD reaches maturity. Thus, before purchasing a CD, you should ensure that you won’t need the funds during the term.
You will be protected as long as you open a CD with a credit union or bank that is insured. Search for banks covered by the Federal Deposit Insurance Corp. (FDIC) and credit unions protected by the National Credit Union Share Insurance Fund (NCUSIF). Depositors will be protected up to a maximum of $250,000 per insured institution, per ownership category.
What Is a Savings Account?
Savings accounts are a standard type of account that banks and credit unions offer their customers. Savings accounts usually earn interest, which allows you to increase your savings over time. You will likely not need to spend very much money upfront on setting up a savings account. To open a checking account, a minimum deposit is usually required by the bank. Still, there is no minimum deposit to be made in some cases.
As soon as the account is opened, you will have rapid access to your funds whenever you need them. You can, however, withdraw funds from your savings account only a certain number of times each year. Your savings account will generally allow you to make six transfers or withdrawals per statement cycle.
A savings account is also insured by the federal government up to a maximum of $250,000, making it an equally safe place to stash your cash.
Even though some of the best savings accounts offer competitive interest rates, not all do so. If you want to earn a higher yield on your savings, you might consider opening an online savings account with a high-yielding bank. As online banks have much lower overhead costs than brick and mortar banks, they can offer their deposit products at much more competitive rates.
CD vs Savings Account Interest Rates
As a result of the restricted access to funds during the CD term, CDs offer higher interest rates than traditional savings accounts. On average, CDs last for three months to five years.
According to current CD rates at the end of mid-September 2020, the best rates for a one-year term CD range from 0.65% to 0.78%, with varying minimum deposit amounts depending on the institution.
In brick-and-mortar banks, interest rates on traditional savings accounts are meager due to the Federal Reserve’s unprecedented lowering of the federal funds rate to almost zero. Consequently, if your money is in a traditional bank savings account, you are likely not to earn enough interest to keep up with inflation if your account is in a traditional bank savings account.
Many online savings accounts’ APY (annual percentage yield) is generally higher. For example, APY rates for best online savings accounts ranged from 0.60% to 0.81% in mid-September 2020. However, according to the Federal Deposit Insurance Corporation, in September 2020, the national average return on savings accounts was just 0.05%.
When comparing CDs and savings accounts, you’ll also see differences in fees. CDs have no monthly fees and no early withdrawal penalties. Savings accounts have varying fees. Usually, if you meet the minimum balance requirements, you won’t be charged a monthly fee.
|Features||Savings Account||CD (Certificate of Deposit)|
|High initial deposit amount||No||Yes|
|Money can be withdrawn at any time||Yes||No|
|Access to ATMs||No||No|
|Fees are charged monthly||Varies||No|
|Fees for early withdrawals||No||Yes|
|Rates of interest are high||Yes||Yes|
Table data Source: https://www.fool.com/the-ascent/banks/cds-vs-savings-accounts/
Do Rates Differ From a Bank or Credit Union?
Banks are usually for-profit institutions, meaning they are either privately owned or publicly traded, while credit unions are nonprofit institutions. Many people would argue that banks are all about getting the best rates, while this is not always the case. It is essential to keep in mind that rates should only be one of the factors to consider when comparing banking options before we get into the comparison of rates.
Besides their fees and customer service options, other factors you need to consider are approval processes and different types of fees. As a result, here’s a comparison of credit union rates and bank rates:
The interest rates on loans at credit unions are commonly lower and the savings rates higher. People who deposit and borrow money can benefit from this. Increased savings rates mean more significant opportunities for financial growth. Lower loan rates mean fewer payments over the term of the loan.
A credit union offers low-interest rates that are hard to beat when it comes to borrowing. Take a look at NCUA’s report on average interest rates if you’re still not convinced you can save by going small and local.
Most credit unions charge rates.
- 58 % for 48-month new car loans
- Loan for used cars for 48 months, 2.75%
- An interest rate of 4.42% on a five-year home equity loan
- 61 % of purchases are made with credit cards
Big banks credit rates
- 62% for new cars financed for 48 months
- 16 % for used cars financed over 48 months
- An equity home loan with a 5-year rate of 5.02%
- 59% for credit cards
You should consider the following steps when choosing a bank or credit union:
- Generally speaking, credit unions tend to have lower fees and a better interest rate on savings and loans. In contrast, banks’ mobile applications and online technology tend to be more advanced.
- Check with your local credit unions and banks whenever you’re interested in any loan. Some online banks may offer lower interest rates than brick-and-mortar banks with an online presence. Still, they often cannot compete with credit unions in this regard.
- It is common for credit unions to provide better customer service. At the same time, national banks tend to have more rigid rules and limited decision-making authority.
When You Should Use a CD
A CD (certificate of deposit) is usually a better option if you wish to save some money for upcoming events and the future. CDs make the most sense for long-term savings if you don’t expect to use them within a few years. For example, suppose you want to buy a house in a year or more. You might want to put part or all of your down payment into a CD. However, your emergency fund should probably be kept in a savings account where you can access it quickly.
When a Savings Account Is Best
If you need access to the money, you should use a savings account rather than a CD. It’s important to remember that a savings account allows you to access your money pretty much whenever you want (with a limit of six withdrawals per month). Suppose your CD matures before the maturity date. In that case, you will likely have a penalty to pay if you wish to access the money before then.
Since a savings account has this fast access to cash, it can be an ideal place to store a reserve in case of an emergency. In addition to saving for short-term goals, saving for a savings account is another good use of the account. For example, the amount you put into a savings account is a good idea if you are trying to save for holiday shopping or upcoming vacations.
The trade-off is that you may miss out on earning a higher interest rate with a CD, which is a disadvantage. Depending on your savings goals, you will have to determine which savings vehicle is the right choice for you.
How to Open a Savings Account
As outlined below, you can open a savings account by following these steps:
1. Choose Your Application Method.
Depending on the institution, you may have the option to apply online, by phone, in person, or even by sending a letter. Applying online can usually be completed within 10 to 20 minutes.
2. Compile Your Identification.
For the application, you will likely need to provide your Social Security number (or tax ID number) and information from a government-issued ID, such as a driver’s license or passport number.
3. Identify Your Contact Information.
In addition to your ID number, you will be required to provide your contact information, including your first and last name, your address – usually, you must be based in the United States– and your telephone number. As well as your email address and date of birth, you may also have to provide additional information.
4. Choose a Joint or a Single Account.
You should indicate to the institution whether you will be opening the account alone or with another person. Any other person whose name will appear on the account will need the information from the previous steps.
5. Review and Accept the Terms and Conditions.
Your bank will ask you to confirm that you have read the disclosure documents regarding fees, liabilities, and how to account interest is calculated. You should select an account that earns high rates while having low or no monthly service charges. Make sure it’s the right account for you.
6. Select the Amount of Your Deposit.
When opening an account online or by phone, you can transfer funds by providing an existing bank account’s routing and account number. A check can be presented to the bank teller if you open an account in person.
There is often a minimum initial deposit, usually between $25 and $100, but some banks require no deposit at all. It’s better to deposit money sooner rather than later, even if you don’t need to fund your account when you first open it. You’ll earn interest sooner that way.
7. Submit Your Application.
When you apply online, you could receive an acknowledgment within minutes. Still, it could take the bank between two and five business days to verify your information, open the account and grant you access.
As soon as your account is opened, you can set up automatic transfers from checking to savings and set up direct deposits. Regular savings deposits will build your bank account with less effort.
How to Open a Certificate of Deposit (CD)
Opening a CD is similar to opening a checking or savings account. The process involves a few more steps. The following steps will help you open a certificate of deposit:
Find a Financial Institution That Is Insured.
The Federal Deposit Insurance Corporation (FDIC) insurance for banks and the National Credit Union Administration (NCUA) insurance for credit unions are both insured. In the event of a bank failure or credit union failure, a certificate of deposit provides the maximum amount of protection.
Choose a Type of CD.
Choosing a certificate of deposit that meets your needs isn’t easy because there are many types available. If you wish to open a savings account, you’ll need to find a bank, credit union, or broker that can help you.
Choose the Term You Want.
A term is one of the first things you need to choose when opening a certificate of deposit. A higher interest rate can be earned by keeping your money in your account for longer, thus lengthening the term length.
Select the Frequency of Interest Payments.
There are two ways you can get your interest payout: As a monthly payment or as an annual payment. Compounding interest can also be earned by reinvesting the interest payments into the CD. Your initial deposit and final interest will be returned once the CD term ends.
Register for a New Account.
To open a certificate of deposit, you must create a new account at the issuing bank or credit union unless you already have one. Information such as your name, address, contact information, and tax identification number (such as a Social Security number) may be required.
Provide Funds for the CD.
You will also need to select a funding source for the new CD account, such as online or telephone transfers or mailed checks.
Is a CD vs Savings Account Right for You?
If you have to choose between CDs and savings accounts, you have to decide how much access to your money you want. The interest rate on CDs is usually higher, but you won’t be able to touch the money for a while. A savings account makes sense if you want flexibility. However, you won’t earn as much interest as you would on a checking account. Since there are many different types of accounts on the market, comparing CDs vs. savings accounts can be difficult.
The best way to decide between these two account types is to shop around to find the one that suits your needs best.