Certificate of Deposit versus Savings Account

February 1st, 2011 | by Cheryl Hills |

As you head to the bank to conduct your normal deposit and withdrawal transactions, you may read or see promotions for this certificate of deposit or that certificate of deposit. If you are at the point where you are comparing your savings account options with the options you have with certificates of deposit, you first need to understand the ins and outs of each type of account.

Time Deposits

A certificate of deposit is a form of a time deposit. A time deposit is when you deposit your money for a specific period of time. For example, if you deposit your money into a one-year certificate of deposit, you do not have access to your money for the one year. If you withdraw your money before the year is up, then you will pay penalty and early withdrawal fees. The longer the term of the time deposit, the higher the interest rate is that you can earn. These are all characteristics you will find in a certificate of deposit.

Financial experts typically advise that if you have investable cash that exceeds $10,000, the money will do better in a certificate of deposit than it will in a traditional savings account. Keep the maturity dates in mind; however, because once you put your money into certificates of deposit, you do not want to access it again until it reaches its maturity date.

Benefits of a Time Deposit

The primary benefit of a time deposit account such as a certificate of deposit is that it pays a higher interest rate than a savings account. The second benefit is that a certificate of deposit is insured by the FDIC if a bank is the issuer or the NCUA if the issuer is a credit union. Above and beyond safety, there is also a security feature when you invest your money into a certificate of deposit. The principal amount you invest is always returned to upon maturity. This is different than a stock or mutual fund, where the principal investment amount can be at risk.

Disadvantages

While certificates of deposit are safe and secure, there are also some drawbacks with using this as a savings vehicle. While certificates of deposit earn higher rates than a savings account, when you deposit your money in a time deposit, you may be losing the opportunity to earn a higher return in another type of investment. You should also be aware of the inflation rate. If your certificate of deposit is not earning you at least as much as the inflation rate, then you may be losing more money that you are earning it.

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