Table of Contents
What is CD?
A CD is a financial instrument issued by a bank or other financial institution. It is a type of savings account that pays a fixed rate of return for a pre-determined period. CDs are FDIC insured and are considered a low-risk investment option.
CDs are generally used as a safe way to save and invest money. They are attractive because they offer higher interest rates than a traditional savings account.
CDs are less risky than stocks and other investments. If the issuing institution fails, the FDIC will insure the deposits up to a certain amount. When you purchase a CD, you agree to leave the funds in the account for a certain period. This period is known as the “term” of the CD. The terms can range from a few months to several years.
When the CD matures, you can withdraw the funds or roll them over into a new CD with a different term. If you roll over the funds, the interest rate may change depending on the current market conditions. They offer a guaranteed rate of return and are FDIC-insured. CDs are an excellent option for those looking for a low-risk investment option with a guaranteed return.
What is Savings?
Customers can save money and earn interest on their deposits with a savings account, a form of a bank account. Customers can deposit funds into the account and generally withdraw them without penalty, although some accounts may limit the number of withdrawals or transfers made each month.
Savings accounts can be opened with banks, credit unions, and other financial institutions. Unlike other accounts, such as checking accounts, savings accounts are not linked to a checking account, meaning that customers must transfer money from their checking account to the savings account before withdrawing funds from it.
Savings accounts offer higher interest rates than other accounts, although the interest rate will vary depending on the institution and the type of account. Interest is paid on the balance in the account and is compounded every month. Savings accounts can be used for long-term goals, such as retirement or a down payment on a house. They can also be used as an emergency fund to cover unexpected expenses.
Money in a savings account is FDIC-insured, meaning the funds are protected up to a specific limit if the financial institution fails. In addition to providing a safe place to save money, savings accounts can also help customers build credit. A savings account can help customers establish a good credit history, making qualifying for a loan or financing easier.
Difference Between CD and Savings
- Savings accounts are more liquid than CDs, which can impose early withdrawal penalties.
- Savings accounts are generally more widely available than CDs, offered by banks and credit unions.
- CDs are generally less accessible than savings accounts, as withdrawing funds early can incur penalties.
- CDs and savings accounts are insured through the Federal Deposit Insurance Corporation (FDIC).
- CDs carry a lower risk than savings accounts, as their principal is guaranteed.
Comparison Between CD and Savings
|Parameters of Comparison||CD||Savings|
|Interest rates||CDs generally offer a higher rate of interest||Low rate of interest|
|Minimum Balance||require a higher minimum balance than savings accounts||Require low minimum balance than CDs|
|Maturity||CDs have a fixed maturity date||often have no maturity date, allowing you to access your money at any time|
|Fees||may incur early withdrawal fees||typically, do not|
|Investments||can be used as an investment vehicle||are used as a place to store money|