Difference between Certificate of Deposit (CD) and Savings Account

In our previous post we talked about the savings accounts and current rates available on the market. I am sure you also notice some advertisements about Certificates of Deposits or CDs. You might have also noticed that the interest rates on CDs are a bit higher. So, what is a CD? 

The main difference between Certificate of Deposit and Saving Account is that you open a CD for a defined term and you cannot withdraw money without penalty or giving up on some of your interest. If you think of term deposits in your country it’s the equivalent of CD in the US. Some CDs might have certain fees assigned and also have higher balance requirements. Also you might not be able to add balance to your CDs and might need to open new CD. 

These are some common features. However, I have seen recently the CDs with low minimum balance requirement and no withdrawal penalties. You can always find CDs with no early withdrawal penalties but the interest rate will be comparable to savings account and there might be other limitations. 

Below are some of the highest rates on 12-month CDs with the general terms. Again, just like with the previous post most of the CDs mentioned here are from online banks (unless otherwise stated).

As always, I warn you that the terms and conditions are always changing and before committing to anything, please review the terms and conditions to see if they are favorable. 

High Interest Rate 12-month CDs:

  1. CIT Bank – offers 1.7% for 12-month CD with a minimum balance requirement of 12 months. Good thing about their product is that the interest rate is locked for the term of the deposit. They do charge penalties on early withdrawals. 
  2. Marcus by Goldman Sachs – 1.6% with minimum $500 to open. They do charge fees in the form of interest forfeiture. For more details please visit their page. 
  3. Ally Bank – 1.5% for 12-month CD, I have not seen any minimum balance requirement. In case you need to withdraw your CD you will pay fees in the form of the interest defined on their page. 
  4. Discover – 1.5% for 12-month CD, fixed interest rate and they require $2,500 to establish an account. Just like competitors they do have early withdrawal penalties.

These are just few examples out of myriad more that exist on the market. All of the banks above are FDIC insured.

As a bonus I’d like to talk about practice of the CD laddering. Basically, what CD laddering allows you is to better control your cashflow and maximize interest rate you receive. It’s not for everyone so please consider your personal financial situation. 

Let’s talk numbers. So, let’s assume you have free $15,000 to invest. You can divide this amount into three equal amounts and open 3 CDs. CD 1: 12-month maturity; CD 2 – 24 months and CD 3 – maturity 36 months. Once the 12-month CD matures then you extend it to 36 months and etc. with your CDs. This basically allows you to lock in high interest rates (where available) and provides better control on your cashflow. 

Remember, always check the terms and conditions before signing up to any product. 

Thanks for reading and good luck saving!

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