A WEALTH OF KNOWLEDGE ARCHIVES

CDs or Savings Account?

September 22nd, 2011, byMichelle Singletary

Q: What’s the difference between CDs and savings accounts? How can I figure out which one is better suited for my needs? 

A: With a savings deposit account, the financial institution holds your money and promises to pay you a certain interest rate. Right now, the rates on traditional savings accounts are pitifully low, at less than 1%.

If you are in search of a savings or checking account with the best rates, check out Bankrate.com’s 2010 High-Yield Checking Study. Bankrate surveyed more than 200 banks and credit unions to find the best high-yield checking accounts across the country.

Now, a CD (“Certificate of Deposit”) is a different type of deposit account with a bank or thrift institution. It typically offers a higher rate of interest than a regular savings account. If you are looking for a low-risk way to save your money, you should consider a CD.

In a CD, you are investing your money over a fixed period of time, such as six months, one year or five years. The financial institution will pay you interest. When you cash in or redeem your CD, you receive the money you originally invested plus any accrued interest. The risk with a CD is that if you need to pull out your money early, you have to pay an early withdrawal penalty or forfeit a portion of the interest you earned.

Before picking a CD, the Securities and Exchange Commission offers these tips:

  • Ask yourself if the CD is right for you, because you may not earn as much compared with investing in stocks and bonds. The principal concern for individuals investing in CDs is inflation risk, which is the chance that inflation will outpace and erode returns over time.
  • Confirm the maturity date on your CD. Many individuals fail to do this and are later shocked to learn that they’ve tied up their money for 5, 10 or even 20 years.
  • Confirm the interest rate you’ll receive and how you’ll be paid. You should receive a disclosure document that tells you the interest rate on your CD and whether the rate is fixed or variable.
  • Be sure to find out how much you’ll have to pay if you cash in your CD before maturity.

I believe you need to keep some cash in a savings account. You need to have quick access to your money in case of an emergency. And, a CD can be a good addition to your overall investment portfolio if you decide you want some of your money to be at low risk.

 

Last modified: September 22, 2011 at 12:53 am