When it comes to saving for the future, there are a lot of options to choose from. You can invest in stocks, bonds, and other types of securities. Or you could choose to put your money into certificates of deposit or savings accounts. So which is the best option for you? Let’s take a look at the pros and cons of each!
What are certificates of deposit?
Certificates of deposit, or CDs, are a type of savings account that typically offers a higher interest rate than a traditional savings account. The pros from The Annuity Expert explain that with this type of saving account you agree to leave your money in the account for a set period of time, usually between six months and five years.
In exchange for this commitment, you earn interest on your deposits. When the term of the CD is up, you can withdraw your money or renew the CD for another term. For example, if you have $500 in a CD that pays an annual percentage yield (APY) of 0.50%, you’ll earn $250 in interest over the course of a year.
The pros of CDs
The main advantage of CDs is that they offer a higher interest rate than other types of savings accounts. This means you can grow your money faster with a CD than you could with a traditional savings account. Additionally, CDs are FDIC-insured, meaning your money is backed by the government by up to $250,000. Additionally, CDs offer a guaranteed rate of return, which can be helpful if you’re saving for a specific goal. Moreover, you can choose to have your CD automatically renewed, so you don’t have to worry about it maturing and having to reinvest your money.
Another advantage is that you can use CDs as collateral for a loan. This can be helpful if you need to take out a loan but don’t have any other assets to use as collateral. For instance, you could use a CD as collateral for a car loan or a home equity loan. Also, if you have a CD that’s about to mature, you can often “roll it over” into a new CD without having to pay any taxes on the interest you’ve earned.
The cons of CDs
One downside to CDs is that they typically have early withdrawal penalties. This means that if you need to access your money before the CD matures, you may be charged a fee. Additionally, if interest rates rise, you may be stuck in a CD that’s paying a lower rate than what’s available. If you need to cash out your CD before it matures, you may have to pay taxes on the interest you’ve earned.
Another drawback is that you have to tie up your money for the term of the CD. This means you can’t access it if you need it. Additionally, if you need to withdraw your money before the CD matures, you may have to pay a penalty. Also, if you invest in a CD that’s not FDIC-insured, you could lose your money if the bank fails.
What is a savings account?
A savings account is a type of bank account that allows you to save money and earn interest on your deposits. You should know that the interest rate on savings accounts is typically lower than the interest rate on CDs. Also, savings accounts are not FDIC-insured, which means your money is not backed by the government.
The pros of savings accounts
One advantage of a savings account is that you can access your money at any time. This can be helpful if you have an emergency fund or if you need to save for a short-term goal. Additionally, savings accounts typically have fewer fees than other types of bank accounts.
For instance, you may not be charged a monthly maintenance fee or an account minimum balance fee. Additionally, many savings accounts offer online and mobile banking features, which can make it easy to deposit money and check your balance. Also, some savings accounts offer sign-up bonuses, which can give you a little extra money to start off with.
The cons of savings accounts
One downside to savings accounts is that they often have low-interest rates. This means it can take longer to grow your money in a savings account than it would in other types of investments. Additionally, some savings accounts have monthly fees or require you to maintain a minimum balance. Also, if you withdraw money from a savings account before the age of 59½, you may have to pay taxes and a penalty.
Another disadvantage is that savings accounts are not FDIC-insured. This means your money is not backed by the government and you could lose your money if the bank fails.
How to choose between certificates and savings?
When deciding whether to invest in a CD or savings account, you should consider your financial goals and how much risk you’re willing to take. If you’re looking for a safe investment with a guaranteed return, then a CD may be a good option for you. However, if you’re willing to take on more risk in exchange for the potential to earn higher returns, then a savings account may be a better choice.
Ultimately, the best decision is the one that aligns with your financial goals and risk tolerance. You should also think of how much money you’re willing to tie up in an investment and how long you’re willing to invest. If you need access to your money sooner, then a savings account may be the better option. However, if you can afford to tie up your money for a longer period of time, then a CD may offer more benefits.
If you’re trying to decide between a certificate of deposit (CD) and a savings account, there are a few things you should consider. Both options have pros and cons, so it’s important to evaluate your financial goals and risk tolerance before making a decision. With these factors in mind, you’ll be better equipped to choose the investment that’s right for you.
What are your thoughts? Let us know in the comments below.