When it comes to saving money people often get stuck by the different options offered by their banks. Some banks insist that you invest or save in certificate of deposit though already the user might be saving on his or her savings account. Savings accounts are more flexible than certificate of deposits. You can withdraw funds without penalty at any time, and you can make ongoing deposits to a savings account. But that doesn’t mean you should rule out certificate of deposits. Certificate of deposit provide a guaranteed interest rate that typically doesn’t change but if it does rise then a savings account might make more sense. But if you are happy to have your money locked up for the time frame of the certificate of deposit then you can opt for it to save money.
Let’s examine what is best for saving money.
Savings account and certificate of deposit both come with interest rate. The difference between the two is that certificate of deposit are time deposits which means you are bound to keep a sum of money for a fixed time period. So that means it requires you to commit to leaving your funds in an account for a minimum length of time. Suppose you can buy certificate of deposit for terms as short as three months and as long as five years. In return, your bank or credit union offers to pay higher rates as you commit to longer maturities.
If you need money for some of your obligations in time to come, like your wedding anniversary, some medical surgery, or paying college fees that certificate of deposit are ideal for funds that you need at a specific future date. Suppose if you know you’ll pay tuition in 19 months, an 18-month certificate of deposit may help you maximize your interest earnings. Alternatively, if you have extra cash that you want to keep safe, with no intention of spending the money soon, a certificate of deposit may be useful.
Remember banks typically pay higher interest rates on certificate of deposits than they do for savings accounts. That’s especially true as you go with longer terms like a two-year certificate of deposit should pay more than a 3-month certificate of deposit. All other things being equal, rates tend to be higher on certificate of deposit than savings accounts.
Therefore with a certificate of deposit, you can predict exactly how much you’ll earn. Most banks set your rate at the beginning of the certificate of deposit, and that rate never changes. That works in your favor if interest rates stay the same or drop, but you might miss out on extra earnings if rates rise significantly.
The only drawback saving money through certificate of deposit is that you cannot cash out before a certain date and if you do your early withdrawal will face a penalty which can wipe out any interest you earn and means taking the original principal deposit. Some type of certificate of deposit like liquid certificate of deposit, allow you to withdraw funds early, it is always advisable to read the terms and conditions before having certificate of deposit.
So as certificate of deposit lock up your money, and you may get stuck with a low rate if interest rates rise. But you can use strategies like certificate of deposit ladders and barbells to reduce risk and get the most out of your certificate of deposit.
What about savings account then?
Savings accounts on the other hand allow you to deposit and withdraw with minimal restrictions although federal law limits certain withdrawals to six per month. Savings accounts are easy to work and understand and is best for cash you might need to access at any time, as well as money you plan to spend in the next six months or so. Suppose a savings account is an best option for a small emergency fund.
Opening a Savings accounts doesn’t require lots of money but you can start with few dollars and then slowly increase according to your capacity.
Certificates of Deposits on the other hand, sometimes have minimum deposit requirements of say atleast $1,000, whereas several online banks offer certificate of deposits with no initial minimums.
Also unlike Certificates of Deposits, savings accounts feature interest rates that can change over time. Normally banks adjust savings account rates in response to the economic environment, competition, and their desire to take on deposits. If rates are rising, your savings account might pay more next month than it pays now and if rates fall sharply, banks typically respond by paying less, while your earnings would not change if you were in investing in certificates of deposits.
Finally experts always advise to go according to your needs and demands. You can use both savings account or certificate of deposits or opt for one as you want. In a savings account always have enough balance that may come handy when you need and remember there are no penalties if you make withdraws only that the minimum balance is maintained in savings account.
Consider using certificates of deposits for some of your excess cash if you have sufficient cash in savings, you like certificates of deposits interest rates.
There are many other options to invest and save money. Like money market accounts have features of both certificates of deposits and savings accounts. Also cash management accounts may also offer higher earnings. Similarly many other schemes or investments help your money grow and it’s your choice to choose which you find flexible.