Certificate of Deposit (CD) vs Savings Account
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What Is a CD Account?
Reasons to Open a CD Account
If you’re looking for a low-risk investment. CDs typically don’t pay as much as investments like stocks, bonds, or real estate. But a CD could make sense if you have a low tolerance for risk and you want to make the most of a safe short- or mid-term investment. Also, CDs offer protection from the Federal Deposit Insurance Corporation (FDIC), which insures deposits up to $250,000 per depositor at U.S. member banks. CDs at credit unions are similarly covered by the National Credit Union Administration (NCUA). If you have a savings goal but lack discipline. The money in a savings account is easy to access, which may be a plus in some instances. But it might also encourage you to spend more. Putting money in a CD generally eliminates that option—unless you pay an early withdrawal penalty. If you have a short-term goal and want a reliable return. Maybe you’re saving for a wedding or a big vacation trip that’s a year or two away. Or perhaps you’re working toward a down payment to buy a home. Because CDs have a fixed rate and term, you should know exactly how much you’ll get when your CD matures. That could make it easier to plan for the future. If CD rates are higher. Over the past couple of years, CD rates have risen a fairly significant amount. For instance, in early 2022, the rates were just 1% APY (annual percentage yield). Currently, the rates are higher than 4%. At higher rates, a CD could be a reliable and lucrative savings vehicle.
Pros and Cons of a CD Account
What Is a Regular Savings Account?
Uses for a Regular Savings Account
To set up an emergency fund. A savings account can be a good place to keep money you might need for unexpected expenses like car repairs or medical bills. To save up for a purchase in the near future. If you need money for something in the next few months, like a new sofa or a down payment on a car, you can save up for it and have it ready for you when you need it. To have a set-it-and-forget-it savings plan. Putting your savings on autopilot can help eliminate spending temptation and savings procrastination. You can ask your HR department to direct deposit a portion of your paycheck into your savings account, or you can set up automatic transfers from your checking account to your savings account. To keep your savings separate from your checking account. Having two different accounts—checking and savings—allows you to separate your everyday spending money from funds for emergencies or a special purpose.
Pros and Cons of a Regular Savings Account
Differences Between a CD and a Regular Savings Account
Other Types of Savings Accounts to Consider
High-Yield Savings Accounts: If you’re looking to maximize the growth in your account with a more competitive APY, you may want to consider a high-yield savings account. These accounts are typically offered by online banks and generally have lower fees and lower minimum balance requirements. Online bank accounts are FDIC-insured, just like traditional bank accounts. Money Market Savings Accounts: With these accounts, you can earn interest on your money and have easy access to it. The APY on a money market savings account may be higher than with traditional savings account APY, but the required minimum balance and fees may be higher as well. Cash Management Accounts: A cash management account is an interest-bearing account generally offered by a brokerage, investment firm, or a robo-advisor. Providers typically partner with banks that hold the money, pay interest, and offer FDIC coverage. These accounts, which are usually managed online and often have low or no fees, are typically used as a place to hold funds earmarked for investing. But they also can work like a spending account—with access to a debit card, checks, and autopay for bills. Specialty Savings Accounts: There are several kinds of specialty savings accounts available, including accounts designed to help young children, teens, and college students learn about managing money. Long-term Savings Accounts: If you’re saving for something that’s far down the road, there are accounts that are geared toward those long-term goals. You may want to consider a 529 college savings plan for your children’s tuition, for example, or a traditional or Roth IRA for your retirement.
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