Is It Better to Buy a CD or Put Your Money in Savings? The Answer Is Simpler Than You Think

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If you have money that you won't need for five or more years, there's only one place it should go: a brokerage account . You can get the best returns possible by investing, and if you invest for the long term, you're taking on minimal risk.

What if you don't have such a long timeline, though? If you'll need the money you're saving in the next five years, you have two big choices about where to put it: You could buy a certificate of deposit (CD) , or you could put the money into a savings account .

It may seem complicated to decide between these two options, but actually, picking the right one is simpler than you'd think. Here's what you need to do to make this choice.

Savings or a CD?

If you're deciding between a CD and savings, the big question to ask yourself is: When am I going to need this money?

If you don't know exactly when you'll need it, like your emergency fund, then there's only one account that's right for it: a savings account. You absolutely would not want to buy a CD if there is any uncertainty at all about whether you'd have to take the money out before the CD matures.

The reason you don't want to buy a CD with money that you'll need soon is because CDs typically come with a required minimum investment term. This is usually anywhere from three months to five years (although there are some 1-month CDs). With most CDs, if you take your money out before the term ends, you'll be hit with a penalty equal to several months of simple interest.

The CD penalty could diminish your returns, or it could even cause you to walk away with less than you invested if you had to take your money back before you'd earned enough interest to cover the fees.

SInce you're investing to make money, not lose money, you can't take a chance on this penalty. The choice is clear: A CD is not the best place for your funds if you aren't 100% confident that the money can stay locked up for the whole term. That money should go in a savings account.

When is a CD the right choice?

If you are certain that you won't need the money for the duration of the CD term, then the answer is also pretty obvious. The money almost assuredly belongs in a CD.

Traditionally, CDs pay higher rates than high-yield savings accounts do. If you're confident you aren't going to need to take the money out early, why not take advantage of the better rate?

Now, right now, CDs and high-yield savings accounts have rates that are pretty comparable. But the CD rate is locked in for the duration of the term, while the savings account rate is variable and can change any time. There's a good chance the Federal Reserve will make multiple federal funds rate cuts in the coming months, which could mean savings account rates plummet.

You can lock into a CD now at a rate comparable to what your savings account offers and be guaranteed to keep it for the duration of the term, so, again there's no reason to pass up that chance.

The only exception is if you think interest rates are going to keep going up in the coming months because then you'd be locked into the CD at a lower rate. However, that's unlikely given today's market where rates remain near decades-long highs now -- and are much more likely to decline than to go up.

As you can see, the decision is clear: Money you won't need for the length of the CD goes into a CD to take advantage of higher rates or a guaranteed consistent rate, while money that you may need sooner goes into savings. It's pretty simple when you boil it down to the basics.

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