Difference between Certificate of Deposit (CD) and Savings Account

Understanding the difference between Certificates of Deposit (CDs) and Savings Accounts is essential for effective financial planning. While both offer opportunities to grow savings, their structures and features differ significantly.

What is a CD?

A Certificate of Deposit (CD) is a financial product offered by banks and credit unions where an individual deposits a sum of money for a fixed period, typically ranging from a few months to several years, in exchange for a predetermined interest rate that is higher than a regular savings account. Once the CD matures, the individual receives their initial deposit plus accrued interest. CDs are considered low-risk investments as they are insured by the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA).

Key Features of CD:

• Fixed-Term Investment: CDs have a fixed term during which the deposited funds must remain untouched. This term can range from a few months to several years, and during this time, the investor cannot access their funds without incurring an early withdrawal penalty.
• Fixed Interest Rate: CD deposits earn a fixed interest rate throughout the term of the investment. This rate is typically higher than that of regular savings accounts, providing investors with a predictable return on their investment.
• FDIC or NCUA Insurance: CDs are insured by either the FDIC or NCUA, depending on whether they are held at a bank or credit union, respectively. This insurance protects the investor’s principal investment (up to certain limits) in the event of bank or credit union failure, providing added peace of mind and security.

What is a Savings Account?

A savings account is a deposit account offered by banks and credit unions that allows individuals to securely store their money while earning interest on their deposits. A savings account provides a safe and convenient way for individuals to save money for short-term and long-term financial goals. Unlike checking accounts, which are primarily used for everyday transactions, savings accounts are designed for accumulating funds over time. Depositors can make unlimited deposits into their savings accounts, and in return, the bank pays them interest on their account balance.

Key Features of Savings Account:

• Interest Earnings: Savings accounts allow individuals to earn interest on their deposited funds, providing a way to grow their savings over time.
• Liquidity and Accessibility: Savings accounts offer high liquidity, allowing depositors to access their funds easily when needed. Whether it’s for emergencies, upcoming expenses, or planned purchases, savings accounts provide a convenient way to manage day-to-day finances.
• Safety and Security: Funds held in savings accounts are typically insured by the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions, up to certain limits.

Difference between Certificate of Deposit (CD) and Savings Account

Basis	Certificate of Deposit (CD)	Savings Account
Meaning	A Certificate of Deposit (CD) is a financial product offered by banks and credit unions where an individual deposits a sum of money for a fixed period.	A savings account is a deposit account offered by banks and credit unions that allows individuals to securely store their money while earning interest on their deposits.
Interest Rates	CD offers high rate of interest as compared to savings acoount.	Savings account provides low rate of interest.
Term vs. On-Demand Access	CDs have fixed terms during which funds cannot be accessed without penalty.	Savings accounts allow for immediate access to funds without restrictions.
Interest Payment	CDs typically pay interest at fixed intervals or at maturity.	Savings accounts usually accrue interest continuously and may pay interest monthly or quarterly.
Risk and Liquidity	CDs are low-risk investments with limited liquidity, ideal for long-term savings goals.	Savings accounts offer higher liquidity but with slightly more risk due to fluctuating interest rates.
Penalties for Early Withdrawal	CDs often incur penalties for early withdrawal before the maturity date.	Savings accounts allow for unlimited withdrawals without penalties.
Deposit Amounts	CDs typically require a minimum deposit amount to open the account.	Savings accounts may have lower or no minimum deposit requirements.
Flexibility of Deposits	Savings accounts typically allow for frequent deposits of varying amounts at any time.	CDs require a single lump-sum deposit at the time of opening and do not permit additional deposits during the term of the CD.

CD and Savings Account – FAQs

Can I lose money in a CD or Savings Account?

CDs along with Savings accounts are insured up to $250,000 per depositor per bank that is FDIC-secured, so your money remains safe even in a bank failure.

What happens when a CD matures?

When a CD comes to its maturity date, then you can decide (a) to cash out the fund, (b) to do a rollover into a new CD, or (c) you can make additional investment decisions.

Are there any fees associated with CDs or Savings Accounts?

Banks may apply a penalty for early withdrawal of CDs or for failing to have a minimum balance of cash in Savings Accounts. Spend some time going through the terms and conditions of the bank before the said bank account is opened.

Can I add funds to a CD or Savings Account after opening it?

The majority of savings accounts provide your ability to deposit in any money amount at will. As soon as you make a CD, generally speaking, you can’t add more after the CD expires. Some banks can give you the chance to create many CDs with diversified maturity dates.

What happens if I need to access my money in a CD before the maturity date?

Withdrawal of cash from a Certificate of Deposit before the maturity period is often attached to penalties, which can be different for an individual bank and CD terms respectively. It’s an absolute necessity to look through the early withdrawal penalties if you’re set to launch a CD in order to get the exact picture of what you may lose.