CD vs. Savings Account: Pros, Cons, and When to Use Each

If you’re looking to grow your money safely, certificates of deposit (CDs) and high-yield savings accounts are solid options. Both earn interest and come with FDIC insurance protection, but they differ significantly in how flexible they are and how much you can earn.

Understanding these differences can help you make the right choice for your financial situation. We’ll compare these two savings vehicles side by side and help you determine which option—or combination of both—works best for your goals.

Table of Contents

1. What is a certificate of deposit?
2. What is a savings account?
3. CD vs. savings account: Key differences
4. Pros and cons
   1. CD pros and cons
   2. Savings account pros and cons
5. Which is better?
   1. You have a set timeline for your goal
   2. You need ready access to your cash
   3. You want to hedge against falling rates
   4. You value flexibility and liquidity over yield
   5. You want the highest return
   6. You expect interest rates to increase
   7. You can afford to lock your funds in for a while
   8. You want to make regular contributions
6. When to consider both
7. FAQ

What is a certificate of deposit?

A certificate of deposit is a time-deposit account where you agree to leave your money untouched for a specific period in exchange for a fixed interest rate. CDs come with set term lengths that typically range from three months to five years, though some institutions offer terms as short as a few weeks or as long as 10 years.

The key feature is commitment. If you need to withdraw your money early, you’ll typically face an early withdrawal penalty that can eat into your interest earnings. The payoff for this commitment is higher rates.

What is a savings account?

A savings account is a deposit account that allows you to earn interest on your money while maintaining easy access to your funds. With high-yield savings accounts, you can often earn a competitive rate, sometimes even close to what CDs provide.

The defining characteristic is flexibility. However, savings account rates are variable, meaning your annual percentage yield (APY) can change at any time based on economic conditions and the institution’s policies.

CD vs. savings account: Key differences

Both options help you grow your money safely, but each has unique pros and cons that make them suitable for different situations.

Feature	CD	Savings account
Interest rates	Fixed rates	Variable rates
Terms	Set term lengths from 3 months to 5+ years	No term commitment
Access to funds	Limited; early withdrawal penalties may apply	Easy access; typically up to 6 withdrawals per month
Deposit requirements	Vary by institution; often $500–$1,000 minimum, but some may have no minimum	Often no minimum or low minimums
Best for	Fixed goals with known timelines	Emergency funds and flexible savings goals

For a more specific comparison, here’s a look at one of our top high-yield savings accounts and one of our top CDs.

Product name	Synchrony 6-Month CD	Capital One 360 Savings
APY	4.10%, fixed	3.40%, variable
Term	6 months	N/A
Min. deposit	None	None

Pros and cons

Understanding the advantages and disadvantages of each account type can help you decide which aligns better with your financial needs.

CD pros and cons

Pros

• Higher fixed rates

  High-yield CDs typically offer higher APYs than high-yield savings accounts, and your rate is locked in for the entire term, protecting you from rate decreases.

• Predictable returns

  Because your rate is fixed, you know exactly how much you’ll earn by the maturity date, making it easier to plan for specific financial goals.

• Safe investment

  CDs are FDIC-insured and carry no market risk, making them one of the safest places to grow your money.

Cons

• Limited liquidity

  Your money is locked away for the term length, and accessing it early usually means paying a penalty that reduces your earnings.

• Inflation risk

  If inflation rises during your CD term, the purchasing power of your money could decline, and you’re stuck with your original rate.

• Commitment requirement

  You can’t take advantage of rising interest rates without opening a new CD or paying early withdrawal penalties

Savings account pros and cons

Pros

• Easy access

  You can withdraw your money at any time without penalties, making savings accounts ideal for emergency funds or short-term goals.

• Flexible contributions

  You can add money to your account whenever you want, allowing you to build your savings gradually over time.

• Adjustable rates

  When interest rates rise, your savings account APY can increase as well, helping you take advantage of favorable market conditions.

Cons

• Variable rates

  Your APY can decrease at any time, potentially reducing your earnings without warning.

• Lower earning potential

  While current high-yield savings rates are competitive, they’re often slightly lower than CD rates, especially for longer terms.

• Temptation to spend

  Because your money is so easily accessible, you might be more tempted to dip into your savings for non-emergency expenses.

Which is better?

The best option depends on your financial goals, timeline, and need for flexibility. Here’s how each account performs in different scenarios.

If you …	Consider …
Have a set timeline for your savings goal	CD
You need ready access to your cash	Savings account
You want to hedge against falling rates	CD
You value flexibility and liquidity over yield	Savings account
You want the highest return	CD
You expect interest rates to increase	Savings account
You can afford to lock in your funds for a while	CD
You want to make regular contributions	Savings account

You have a set timeline for your goal

If you’re saving for a specific goal with a known timeframe, like a down payment in two years, a CD lets you lock in a guaranteed rate and removes the temptation to spend.

You need ready access to your cash

For emergency funds or when you might need money on short notice, a savings account provides the liquidity you need without penalties.

You want to hedge against falling rates

Locking in today’s rates with a CD protects you if interest rates decline during your term, ensuring your earnings remain stable.

You value flexibility and liquidity over yield

When life is unpredictable or you prefer having options, a savings account gives you the freedom to access your money and adjust your strategy as needed.

You want the highest return

CDs typically offer slightly higher rates than savings accounts, especially for longer terms, maximizing your earnings if you can commit.

You expect interest rates to increase

If rates are likely to rise, a savings account allows you to benefit from those increases without being locked into a lower rate.

You can afford to lock your funds in for a while

When you have a healthy emergency fund and won’t need the money, a CD’s higher fixed rate makes it the better choice for maximizing growth.

You want to make regular contributions

If you’re building savings gradually with regular deposits, a savings account accommodates ongoing contributions, whereas most CDs allow a one-time deposit.

When to consider both

You don’t have to choose just one option. In fact, using both CDs and savings accounts together can give you the best of both worlds in several situations:

• You want liquidity and higher returns: Keep your emergency fund in a savings account for quick access, then use CDs for additional savings you won’t need immediately.
• You’re building an emergency fund: Build your emergency fund in a savings account first, then use CDs for other goals once that cushion is in place.
• You like predictable access to funds: A CD ladder, which involves opening multiple CDs with staggered maturity dates, provides higher CD rates while ensuring regular access as each CD matures.

FAQ

How much does a $10,000 CD make in a year?

The amount you earn depends on the CD’s annual percentage yield (APY). For example:

• At 4% APY, a $10,000 CD would earn about $400 in interest after one year.
• At 5% APY, it would earn around $500.

Your actual earnings may vary slightly based on how often the bank compounds interest (daily, monthly, or annually).

Do you pay taxes on CD interest?

Yes. CD interest is considered taxable income in the year it’s earned, even if you don’t withdraw it until the CD matures. Your bank will report this income to both you and the IRS using Form 1099-INT, which you’ll need when filing your taxes.

What bank is best for a savings account?

The best savings account depends on your priorities, but online banks generally offer the highest APYs and lowest fees.

Traditional banks may offer lower yields but can be more convenient if you prefer in-person service.

Here is our roundup of the best savings accounts.

How much money should I keep in savings?

Most experts recommend keeping three to six months’ worth of essential expenses in an emergency fund.

If your income is irregular or you’re self-employed, aim for closer to six to nine months of expenses for added security.

If your monthly expenses are $3,000, that means saving $9,000 to $18,000.

Keep these funds in a high-yield savings account so they’re easy to access and still earn interest.