CD vs. Savings: Which Earns More Interest in 2021?

CDs might offer a higher interest rate than savings accounts, but they do come with fine print that you should be aware of before deciding to put your money in one.
Last updated May 27, 2021 | By Taylor Medine | Edited By Jess Ullrich
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When the Federal Reserve cut the Fed Funds rate in 2020, it was great news for mortgage and loan interest rates, but not so great news for savings rates. Because savings rates are also tied to the Fed Funds rate, they began trending downward.

If you have money socked away in savings, you may be wondering whether it’s a good idea to move it to a certificate of deposit account, where you might get a higher annual percentage yield. This post explores how certificates of deposit (CDs) work, how savings accounts work, and how interest on both accounts compares.

In this article

How does a CD work?

CDs are accounts that lock you into a fixed interest rate for a fixed term, so you get a guaranteed return. The big draw of CDs is that the APY may be higher than you might get with a savings account. Typically, you make one lump-sum deposit into a CD. After the CD matures, you could enter a new term or withdraw the cash.

APYs on CDs can vary from one institution to the next. For example, brick-and-mortar banks might offer less than .05% on CDs, whereas some online banks give .50% or more. Generally, the longer CD term you choose, the higher the APY is, but that doesn’t mean you should dump all your money into a long-term CD.

If you end up taking out cash early, you could get hit with an early withdrawal penalty, which could equal a certain number of days in interest. For example, if you withdraw early from a one-year CD, you could get charged 120 days of interest. The good news is that CDs offer flexibility, so you may be able to find one that works for you. Terms available may range from one to 60 months or more.

If you open a CD at a Federal Deposit Insurance Corp.-insured bank or National Credit Union Association-insured credit union, up to $250,000 of your money is guaranteed should the financial institution fail — this makes CDs a highly secure way to invest money. Before putting money into a CD, it’s essential to check that an institution has this insurance. The best banks will make this coverage clear to you on the website.

What’s a CD good for? A CD account can be a good place to put excess savings you don’t want to invest in the market. If you have money saved up for a more near-term goal — such as buying your child their first car next year — a high-interest CD could be a safe place to put the money for a set period of time until you’re ready to use it.

How does a savings account work?

A savings account is a type of deposit account that offers greater access to your cash than a CD. You can deposit and withdraw funds regularly from a savings account; however, you may be limited to six electronic transfers per month because of Federal Reserve Board Regulation D.

The trade-off to the flexibility of savings accounts is that the APY might be lower than CDs. Also, savings account rates are typically variable, which means they can go up or down after you open the account. As with CDs, if you open a savings account at a credit union or bank that’s NCUA- or FDIC-insured, your money is guaranteed up to $250,000.

What’s a savings account good for? A savings account is a place to store everyday savings that you might need to dip into to cover a bill or an unexpected expense. The general rule of thumb is to have three to six months’ worth of expenses stashed in case you lose a job or face a loss in income, and a savings account may be a good place to put this emergency fund.

Besides saving for emergencies, you can also use multiple savings accounts to save incrementally for different financial goals. Planning a wedding, saving for a down payment, or wanting to take a vacation this summer? You could create separate savings accounts to save for each life event.

CD vs. savings account: A quick comparison

CD account Savings account
Interest rates Typically fixed rates and can vary depending on the CD term and the financial institution Often variable rates and can vary depending on where you open an account
Liquidity
  • Must wait to withdraw funds until the end of the CD term
  • Terms may range from three months to five years or more
  • Early withdrawals usually trigger an early withdrawal penalty
  • Can make ongoing deposits and withdrawals
  • There may be a fee if you make more than six electronic withdrawals in a month
Insurance Up to $250,000 of your money is guaranteed at NCUA- and FDIC-insured financial institutions Up to $250,000 of your money is guaranteed at NCUA- and FDIC-insured financial institutions
Minimum deposit Some CD accounts may have no minimum deposit requirement, while others may require $50, $500, $1,500, or more to open Minimum balance requirements vary but may be as low as $0
Who it’s best for Best for savers who have excess cash they want to stash at a higher interest rate Best for savers putting away money for emergencies or surprise bills

CD vs. savings: Which earns more interest?

As mentioned, interest rates can vary from one financial institution to the next, but CDs — especially those with longer terms — tend to offer a higher APY than savings accounts. Online CDs specifically may offer a much higher rate than savings accounts at brick-and-mortar banks. The best way to find the highest rates and most advantageous terms on a savings account or CD account is to shop around with multiple banks and credit unions.

If you are interested in opening a CD because of the higher rates but are wary of locking your money into a fixed term, CD laddering is a strategy to consider. CD laddering is when you break up your cash into multiple CDs with different maturity dates. This way, cash becomes available in staggering time frames, and you get access to funds that you can withdraw without penalty.

For example, you could set up CDs to mature every year. Here’s how this might play out if you have $10,000 saved:

  • One-year CD with $2,500 at .55%
  • Two-year CD with $2,500 at .55%
  • Three-year CD with $2,500 at .55%
  • Four-year CD with $2,500 at .55%

With this strategy, $2,500 (plus interest earned) would come available each year.

Another type of account you could use instead of CDs is a high-yield savings account. These accounts are designed to offer a higher APY than traditional savings accounts. FDIC data shows that the national rate for a savings account is currently sitting at just .06%; meanwhile, Axos Bank offers up to .61% APY and Alliant Credit Union offers .55% on their high-yield savings accounts. Aspiration is an example of a financial company that offers up to 1.00% APY on its Aspiration Plus account, and funds are held at FDIC-insured partners (rates as of May 27, 2021). If that sounds like a good option for you, this Aspiration review shares more information about the company and its accounts.

FAQs

Is a CD better than a savings account?

Whether a CD or savings account will be better for your savings goals depends on your situation. CDs might offer a higher rate of return, so opening one could be a better option if your focus is earning as much interest as possible while money is sitting in an account.

However, with a CD, your money is locked away for a set amount of time, and you might be charged penalties if you take money out early. For this reason, a savings account could be the better option to store savings you might need to dip into for new tires or an unexpected tax bill.

How do savings accounts differ from CD accounts?

Savings accounts are bank accounts where you can regularly make deposits and withdrawals. These accounts may come attached to a checking account, which makes transfers easy. The drawback to savings accounts is they tend to have a low APY, though certain banks do offer high-yield savings accounts.

CD accounts may offer a higher APY than savings accounts because you agree to leave your money in the account for a preset term that could range from six months to five years or more. Withdrawing funds before the CD matures could result in early withdrawal penalties.

Are CDs worth it?

CDs may or may not be worthwhile, depending on how much money you have to deposit, the length of the term you’re able to sign up for, and the CD rates.

Opening up a short-term CD of six or fewer months may not be worthwhile because the APY could be comparable to what you might get with a savings account. However, an advantage of going with a CD account, even if the rates are similar, is that the fixed term could force you not to spend money you might spend otherwise.

If you have the flexibility to go with a longer term, a CD could provide a greater upside because interest rates tend to get higher the longer the CD term you choose. Keep in mind that CDs may also have deposit minimums, so you’ll need to consider what you have available to comfortably deposit into a CD before going CD shopping.

The bottom line

When choosing where to put your money, there’s no lack of options. If you’re looking to earn a higher APY on excess cash that’s currently in savings, opening up a CD could be the way to go.

However, a savings account may be the better choice for the money you might need to use on a rainy day. The APY for a savings account may be less than the APY on a CD account, but you would not have to worry about paying the price for making early withdrawals.

If you’re in the market for a new savings account, FinanceBuzz’s roundup of the best savings accounts can help you find your next one.

  • Earn cash back rewards - up to 10% - when you spend with your debit card
  • Get $150 bonus when you spend $1000 in the first 60 days
  • Up to 1.00% APY interest (up to 25 times higher than Big Banks)
  • Unlimited fee-free withdrawals at 55,000+ ATMs
  • Deposits are FDIC insured

Author Details

Taylor Medine Taylor Medine is a freelance writer who's covered all things personal finance for the last six years. She enjoys writing financial product reviews and guides on budgeting, saving, repaying debt, and building credit.