3 Reasons Opening a CD Beats Putting Money in Savings

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Savings accounts give you easier access to your money, and most have no required opening deposit. But read on to see how a CD can be better. [[{“value”:”

Should you put your money into a certificate of deposit (CD) or a high-yield savings account? Both types of bank accounts are offering similar rates right now. You can find many CDs and many savings accounts paying upward of 5.00%. So, does it really matter which you pick?

Actually, the answer is yes. And in the right circumstances, there are three important reasons why opening a CD could be a way better idea than sticking your money in a savings account.

1. You may be able to get a higher rate

One of the best reasons to buy a CD is because CDs often provide higher rates than high-yield savings accounts do. The national average rate on savings accounts is 0.45% according to the FDIC, while the national average rate on a 12-month CD is 1.80%.

Of course, there are savings accounts and CDs paying well above the national average rate. The Ascent’s list of the best CD rates shows many options with yields above 5.00%. But the data from the FDIC still shows the general trend. CDs pay better rates because banks need to give you higher yields to convince you to lock up your money.

See, while you can take funds out of your savings account any time, you must wait until your CD matures and the term ends to make withdrawals if you don’t want to be penalized. Giving up access to your money is justified by the higher rate you get. So as long as you don’t need to withdraw your cash early, the higher rate makes CDs the better choice.

2. Your rate is locked in

There’s another big benefit to CDs compared with high-yield savings accounts: With a CD, you are guaranteed to get the promised yield for the entire duration of the CD term. If you buy a 5-year CD paying 4.35%, you will earn 4.35% on your money for the next five years — guaranteed.

But high-yield savings accounts have variable rates. This means your bank could change the rate whenever it wants to. If interest rates start to go down — as many experts expect in the coming months — today’s savings accounts paying 4.00% or 5.00% or better are going to quickly cut the yields they are offering. You could find yourself earning much less on your invested funds than you are now.

3. You won’t be as tempted to touch your money

Finally, CDs could offer less temptation to withdraw funds early. While you can take money out of savings whenever you want, you can’t do that with a CD or you could face a big financial penalty.

Now, this is often viewed as a disadvantage since you’re giving up access — but if you know you don’t want your money sooner than the CD term, it could be a benefit to you. The penalty acts as a deterrent against unnecessary withdrawals, helping you stay on track toward your savings goals by removing the temptation to make an early withdrawal.

For all of these reasons, you should think seriously about putting some of your money into CDs — as long as you know you won’t need it for the duration of the CD’s term.

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