CDs vs. Savings Accounts: Which Is the Better Choice for Your Money?

It's an age-old debate, and one that has gotten more interesting with the rise of interest rates on all savings products: Which is better, a high-yield savings account or a certificate of deposit (CD)?

To be sure, many savings accounts and CDs both have very, very competitive rates (currently higher than 5% APY). No matter which one you choose, you're going to be earning a good amount of interest. But for most people, one or the other will better serve their financial goals. With that in mind, let's take a look at when you should open a CD and when you should stash your cash in a savings account.

CDs: Better for your long-term savings

If you have savings you're not going to use in the near term, a CD might be the better choice for you.

Of course, this hinges on what we mean by "near term." I'd say, if you're saving for a date that's at least three to six months away, you're probably better served by a CD. This is especially true if you're saving for a goal that's one year or longer away, as rates on savings accounts will likely be lower by that point.

Keep in mind that CDs have the ability to lock in an annual percentage yield (APY) for the length of your term. This guarantees that you'll earn a specific amount of interest, no matter how rates swing in the overall market. Savings accounts, on the other hand, can't lock in rates for any amount of time. So, while savings accounts may have comparable APYs to CDs, your bank has the right to drop your rate at any time.

Of course, to freeze these CD rates, you have to agree to lock your money up for the length of your term. This could come back to haunt you. For example, if you need your savings sooner than you expected, you'd have to swallow an early withdrawal penalty to access it. For this reason, it's wise to leave some money in a savings account, just in case you need it fast.

Savings account: Better for short-term savings

Unlike CDs, savings accounts don't have early withdrawal penalties. This gives you greater access and more flexibility with your funds. Some high-yield savings accounts have limits on how much you can withdraw per month (per old Regulation D rules). But the penalty for exceeding these limits is usually far less than the withdrawal penalties on CDs. All in all, this makes them a better place to store money you plan on using in the near term, as well as your emergency fund.

The downside of easier withdrawals is that you may be more tempted to spend your savings. While a CD discourages you with its penalties, a savings account may not discourage you enough. As long as you're disciplined with your money, this shouldn't pose a problem. Otherwise, you might want to check out some short-term or no-penalty CDs, to keep your hands off your own cash.

All in all, both CDs and savings accounts are both great opportunities right now. That said, CDs have a slight advantage in that they can freeze your rate for the length of your term, while even the best savings accounts may not earn high interest for much longer. Decide which is better for your savings, then take a look at our list of bank reviews to discover the best offers for both.