- If you need ready access to your cash, a savings account is preferable to a certificate of deposit. With a savings account, withdrawing money is as easy as getting out your ATM card or visiting your bank branch. If you need to take money out of a CD, you risk incurring an early withdrawal penalty that could greatly reduce the interest you earn. If you need to build an emergency fund you can draw on when you need it, a savings account is the best vehicle.
- Chances are that the yield on a CD will be higher than the yield on a savings account. You can close the gap somewhat by seeking out a high-yield savings account, but in most cases the rates on CDs will still be higher. If you can afford to keep your money tied up for the full term of the CD, you can probably earn a better rate of interest. The interest rates on CDs tend to go up as the term increases, so you need to evaluate your needs for ready cash and compare them with the rates offered on various CD terms.
- If you need the money in your certificate of deposit before the maturity date, you will face an early withdrawal penalty. The specifics of the penalty vary from CD to CD, but the penalty generally means giving up a portion of the interest on the money. If you think you might need the money before the CD term is up, put the money in a savings account. Seeking out the highest yielding savings account you can find can give you more for your money.
- One way to resolve the questions of which is better is to use both CDs and savings accounts for your short-term capital. Keep your emergency fund and ready cash in a savings account, preferably a high-yield savings account at your bank or credit union. Then keep the remainder of your short-term money in a higher yielding certificate of deposit. Choose a CD with a term that matches the amount of time you can afford to keep that money tied up. When the CD matures you can decide whether to roll it over into a new certificate of deposit, put it in your savings account or invest it elsewhere.
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