CDs vs Online Savings Accounts: Consider Both for Your Savings
CDs and online savings accounts may help you grow your money over time.
Looking for a way to put your money to work and build your savings? There are many types of savings accounts out there but two of the most common and effective for growing your money are certificates of deposit (CDs) and online savings accounts.
You may have heard chatter about these account types recently due to their higher than average rates over the past few years.
Let’s look at how these accounts work and how they may help you reach your savings goals.
Both CDs and online savings accounts earn interest on deposits.
CDs often require you to keep money in the account for a set period, known as a term, and may charge a penalty if you withdraw funds before the CD matures.
Online savings accounts allow you to access your money at any time but may have lower rates than CDs.
Overview of CDs and Online Savings Accounts
As we mentioned, CDs and online savings accounts may help you build your savings, but one may be better suited to your saving strategy than the other. Let’s take a look at how they work.
Online Savings Accounts
Online savings accounts are deposit accounts, meaning you place your funds (i.e., “deposit”) into the account and withdraw your money as needed. Keep in mind that some online savings accounts may have minimum balance requirements or restrictions on the number of withdrawals you’re able to make each month.
And since these are savings accounts, they earn interest—expressed as Annual Percentage Yield (APY) which includes the rate itself plus the benefits of compounding (as well as the impact of any fees incurred).
And how big is that APY? Well, that depends on the kind of savings account you choose. Many savings accounts you find online, likely through a digital bank, offer rates far beyond the average of traditional, brick-and-mortar banks. Accounts with higher rate offerings are referred to as high-yield savings accounts. In fact, some high-yield accounts were offering rates over 5.00% APY in September 2023.1
Just remember that rates on savings accounts are variable and fluctuate with market changes, so the rate you see today may change in the future.
Certificates of Deposit
Similar to online savings accounts, money held in CDs also earns interest. But, unlike savings accounts, CDs typically require your full deposit up front, and you usually can’t add to the balance later on.
CDs also require a time commitment, known as a term, and you’re expected to leave your money in the account until the CD matures. Longer term CDs typically have higher rates than short term CDs, but you may not find that to be true in all rate environments.
If you withdraw money from your CD before the term ends, you may have to pay a penalty. Additionally, some banks may not allow you to withdraw money at all until the CD maturity date.
CDs usually offer a fixed rate that may be higher than even a high-yield savings account, and the CD rate is typically fixed for the term. So the benefit is that your CD continues earning the fixed rate even if market rates drop during the term. This is a nice feature when you’re looking for more stable returns and opportunities to protect your money from inflation.
Both CDs and online savings accounts are FDIC-insured provided they’re offered by a chartered bank. This insurance means your money is safe even if the bank fails, up to the specified limits of $250,000 per depositor, per account type, per institution. Remember that some financial institutions, such as neobanks, may not be FDIC-insured, so always check with your financial institution prior to opening an account.
Online Savings Accounts vs. CDs: Which is Right for You?
Now that you understand how online savings accounts and CDs work, let’s compare the two side-by-side.
Online Savings Accounts
Rates of Return
Typically fixed and vary depending on the term length
Variable but typically higher than traditional savings accounts
Typically none, although brokered CDs may require a management fee
Typically none, although some banks may require a minimum balance and/or charge a maintenance fee
Often a penalty if funds are withdrawn before term ends
Withdrawals permitted at any time. Some banks restrict the number of withdrawals you may make each month
Varies by CD
Varies by bank - Some banks have no minimum balance requirement
One deposit to open the account. Ongoing deposits aren’t usually allowed
Allows ongoing deposits
Best Suited For
Individuals interested in long-term savings with steady rates of return
Individuals who need easy access to their money
Is a CD or Online Savings Account Better?
There’s no one way to build your savings, and using a combination of different savings vehicles may help your money grow more over time.
One of the best ways to determine which savings account type is right for your situation is to consider how much flexibility you need when it comes to the funds.
For example, a CD may be a great choice if you’re saving for a major purchase, like the down payment on a house, and won’t need the money for a while. In this case, a CD offers consistent returns on your savings while keeping the money out of reach so you aren’t tempted to use it on spontaneous purchases.
On the other hand, if you’re looking for a place to store your emergency fund, an online savings account may be the better choice to keep your money accessible while still earning interest at a higher rate than in a traditional savings account.
As always, if you have questions about your specific financial situation, it’s often best to consult a financial advisor to help you decide on a savings plan.
Both CDs and online savings accounts could help you build your savings and earn interest over time.
Though CDs typically offer higher rates, they often come with restrictions that make accessing your money more difficult. Online savings accounts may offer similar rates and give you more flexibility for accessing funds, allowing you to use your money without worrying about penalties.