2 Unexpected Advantages of CDs Over Savings Accounts

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A lot of people are rushing to open certificates of deposit (CDs) today. And I can totally see why. Today's CD rates are the highest they've been in years, with some products paying upward of 5%. And while you might earn a totally respectable amount of interest in a high-yield savings account, why shouldn't you chase the highest rate possible on your money?

But a higher interest rate isn't the only benefit CDs offer over savings accounts. Here are a couple more reasons to choose a CD instead right now.

1. You don't have to worry about economic conditions impacting your savings goals

The gap between what a savings account might pay you today versus a CD isn't all that large. My bank, for example, is giving me 4.25% APY on my savings, whereas its best CD rate right now is 5% for a 12-month term. For a $10,000 deposit, we're talking about a difference of $6.25 per month.

But remember, the interest rate on a savings account can change over time. The interest rate on a CD is locked in and guaranteed. And if you're relying on a certain interest rate on your money to hit a particular savings goal, then opening up a CD is really the only way to make that interest income a sure thing.

For example, maybe you're hoping to buy a new laptop about a year from now, and you're relying on getting a certain interest rate on your money to have enough cash for your purchase. With a CD, you won't have to worry about your rate going down.

This especially holds true right now. The whole reason savings accounts and CDs have been paying so generously is that interest rates are up broadly due to the Federal Reserve's series of hikes in 2022 and 2023. The Fed has stated that it's looking to start cutting interest rates at some point in 2024, though.

Once that happens, the savings account rates are likely to fall. But if you lock in a CD rate now, you'll continue to enjoy that rate throughout your CD's term, no matter how interest rates trend overall.

2. You may be less tempted to touch your money for fear of being penalized

The money you house in a savings account is cash you're allowed to withdraw at any time. With a CD, you can technically withdraw your money whenever you want, but you'll likely be penalized for taking your money out prior to your CD's maturity date.

The amount of the penalty will depend on your bank, as well as the term of your CD. My bank charges a penalty of three months of interest for cashing out early on a CD with a term of 12 months or less. But actually, I don't think that penalty is such a bad thing.

Hear me out: Since there's no penalty to tap my savings, I may sometimes end up taking a withdrawal for things like concert tickets or weekend getaways when I should really be reserving that money for more important purposes, like emergency expenses or other big goals.

But because the money I have in CDs is more restricted, I'm very good about leaving it alone to avoid paying penalties. So if you're serious about meeting a specific savings goal, you may want to stick to a CD, too. The fear of a penalty looming over your head might be the thing that helps you avoid dipping into your cash reserves when you really shouldn't be.

Savings accounts offer the benefit of flexibility -- there's no question about it. But you may want to consider a CD in the near term not just for the higher interest rate on your money, but for the guarantee of that rate lasting and the penalty that might make it possible for you to avoid temptation.

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