Are CDs Really Better Than Savings Accounts? Here's the Truth

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A lot of people are rushing to put money into CDs these days while rates are high. And to be clear, there's a good chance that CD rates will remain strong through the end of 2024. However, once the Federal Reserve starts cutting interest rates, which it may do before the year wraps up, CD rates may start to fall.

Even so, for the most part, you'll be able to earn more interest with a CD than with a regular savings account. So by virtue of that alone, you can make the argument that there's an advantage to keeping money in a CD.

But are CDs really better than savings accounts? There's a reason they could be -- but it's not necessarily the one you think.

Why CDs have an advantage

Not only do CD rates tend to be higher than savings account rates, but with a CD, your interest rate is guaranteed until the end of the term you sign up for. With a savings account, for example, you could start out earning a 4.60% APY on your money. If market conditions change, your APY could fall to 4.40% a month later and 4.20% the month after that (and so on and so forth), and there's nothing you can do about it.

But if you open a 12-month CD at 5.00%, you're guaranteed that 5.00% APY for a full year. Even if savings account rates fall substantially across the board during that time, your CD's interest rate is safe.

Of course, the flipside there is that with a CD, you're forced to keep your money in the bank until the end of the term you locked in. If you take an early withdrawal, you'll typically face a penalty of some sort, the exact amount of which will depend on your bank.

But that's actually not such a terrible thing. In fact, those penalties are what really give CDs an advantage over savings accounts .

When a penalty is a good thing

Hear me out. With a savings account, there's no restriction on removing your money. So if you're saving up a down payment for a home but a friend invites you on a fun weekend getaway, you may be tempted to remove the $1,500 needed to make that happen, thereby setting yourself back as far as your savings goal is concerned.

With a CD, there's real motivation to keep your money where it is -- you don't want to incur a penalty. So by putting money into a CD, you may be more likely to stick to your goals. And that's where a lot of the real value lies.

Should you open a CD?

If you have money you don't expect to need or use for a period of time, then it makes sense to put it into a CD for the higher interest rate -- and also, to help yourself avoid the temptation to withdraw your cash for the wrong reason. But before you open a CD, make sure you're truly all set as far as your emergency fund goes, and that you don't have any upcoming expenses to worry about.

If your car has been giving you trouble, for example, then it may be the wrong time to tie up a few thousand dollars in a CD. Similarly, if you got your heating system serviced last winter and were told that it may not last beyond the season, then you may have a large repair or replacement to deal with this coming winter. So tying up money in a CD doesn't sound like the smartest bet in that scenario (unless you have separate funds to tackle that home repair).

But generally speaking, a CD can be a great means of forcing yourself to save your money rather than spend it. Without a doubt, that gives CDs an edge over savings accounts.

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