Difference between Certificate of Deposit (CD) and Savings Account
Basis |
Certificate of Deposit (CD) |
Savings Account |
---|---|---|
Meaning |
A Certificate of Deposit (CD) is a financial product offered by banks and credit unions where an individual deposits a sum of money for a fixed period. |
A savings account is a deposit account offered by banks and credit unions that allows individuals to securely store their money while earning interest on their deposits. |
Interest Rates |
CD offers high rate of interest as compared to savings acoount. |
Savings account provides low rate of interest. |
Term vs. On-Demand Access |
CDs have fixed terms during which funds cannot be accessed without penalty. |
Savings accounts allow for immediate access to funds without restrictions. |
Interest Payment |
CDs typically pay interest at fixed intervals or at maturity. |
Savings accounts usually accrue interest continuously and may pay interest monthly or quarterly. |
Risk and Liquidity |
CDs are low-risk investments with limited liquidity, ideal for long-term savings goals. |
Savings accounts offer higher liquidity but with slightly more risk due to fluctuating interest rates. |
Penalties for Early Withdrawal |
CDs often incur penalties for early withdrawal before the maturity date. |
Savings accounts allow for unlimited withdrawals without penalties. |
Deposit Amounts |
CDs typically require a minimum deposit amount to open the account. |
Savings accounts may have lower or no minimum deposit requirements. |
Flexibility of Deposits |
Savings accounts typically allow for frequent deposits of varying amounts at any time. |
CDs require a single lump-sum deposit at the time of opening and do not permit additional deposits during the term of the CD. |
Difference between Certificate of Deposit (CD) and Savings Account
Understanding the difference between Certificates of Deposit (CDs) and Savings Accounts is essential for effective financial planning. While both offer opportunities to grow savings, their structures and features differ significantly.