CD vs. Savings Account: Which Should I Choose?

Which is the better place to park your money, a certificate of deposit or savings account? Savings accounts give you more flexibility to make withdrawals, but CDs offer a set interest rate if you’re willing to leave your money alone for a certain amount of time. The best place to deposit your cash generally depends on how long you’re willing to leave it in your account.

Savings accounts

What is a savings account? A savings account is a bank account that typically earns interest. You can withdraw money as needed, though many banks limit the number of times you can make certain types of withdrawals — such as bank transfers and telephone transactions — to six per month. If you exceed the limit, the bank may charge a fee of around $5 for each extra transaction. If there are repeated excess withdrawals, the bank may close the account or convert it to checking, depending on its policy.

Choose a savings account if: You might need access to the money in the near future. Savings accounts are especially good for emergency funds because they can offer fast access to cash if you incur an unexpected expense. CDs, on the other hand, often charge a penalty to make early withdrawals.

Keep in mind: To get the most out of your funds, place them in a high-yield savings account — often offered by online banks and credit unions — which provide an above-average interest rate. (Read more about NerdWallet's favorite high-yield savings accounts.) The national average savings rate is only 0.06% APY, but a high-interest savings account can earn close to ten times the national average. It may not make you rich, but the extra money can help.

A savings account doesn't guarantee the same rate forever. Use NerdWallet’s interest rate calculator to explore how much your money could earn with different rates.

Certificates of deposit

What is a CD? A CD is a type of deposit account that can pay a higher interest rate than a standard savings account in exchange for restricting access to your funds during the CD term — often between three months and five years. Take money out before maturity, and you’ll often pay a penalty. For example, you might have to forfeit a portion of the interest you earned, depending on the bank’s policy.

Choose a CD if: You’re certain you won’t need to access your cash for several months or years, depending on the goal you have for that money. If you want to know more about choosing a term and type of CD, see this guide to opening a CD account.

Many CDs with longer term lengths offer rates that are higher than the best savings accounts. (Explore the best one-year CD rates here.)

Keep in mind: CDs allow you to lock in a rate for the length of the term, which is great if rates fall. But if rates rise, you might end up earning less than if you had chosen to put your funds in a high-yield savings account.

You can lower this risk by creating a CD ladder. It involves opening several CDs with varying term lengths instead of putting all your money in a single account. As each shorter-term CD matures, you’d move the balance into new CDs with longer terms and higher rates.  This would allow you to take advantage of higher rates while regularly having access to maturing CDs. To learn more about this approach, read our explainer on CD ladders.

How to open a savings account or CD

You can typically open a savings account or CD the way you would any other bank account: visit a branch or follow the prompts on the bank's website. You'll likely need to provide ID and some additional information, such as your address, Social Security number or birthdate.

The minimum opening balance for a CD is often more than the minimum required to open a savings account, but some banks and credit unions let you open CDs with no minimum. Use NerdWallet’s CD tool to find the best CD rates, minimum balances and term lengths in your area from credit unions, online banks and traditional banking institutions. If a savings account is better for your needs, you can browse NerdWallet’s high-yield savings accounts tool to find accounts with the best rates.

Once you open the best account for your situation, you’ll be able to take the most enjoyable step: Sit back and watch your money grow.