A certificate of deposit is a safer investment option when compared to a savings account. This is mainly because CDs restrict fund access, which does not happen in the case of savings accounts. This increases the chance of fraud in savings accounts.
Difference Between Certificate of Deposit and Savings Account
Putting your savings in the right investment option can be confusing, especially when choosing between a certificate of deposit and a savings account since they are somewhat similar.
However, you should note that they serve different purposes, making the choice critical. Here is a complete guide on CDs vs savings accounts that can help you decide where to put your money.
What Is a Certificate of Deposit?
When Should You Choose Certificate of Deposit?
Wondering when will be the right time to put your savings in CDs? You can do so under the following circumstances:
- If you are saving up for a goal that does not need a constant supply of money at regular intervals.
- If you are not looking forward to taking a loan from your investments in CDs and have other sources to arrange funds.
- If you have a low-risk appetite and want to generate stable returns from your deposits.
Ticked all three of the above criteria? Then investing in CDs would be immensely beneficial. However, you must remember certain things before beginning your investment journey.
What Are the Things to Keep in Mind Before Investing in a Certificate of Deposit?
Want to make the most out of your investment in this scheme? Here are some of the subtle but crucial things that you should keep in mind when investing in CDs:
- Compare the rate of a CD with that of a savings account to check which offers a higher yield on your investments.
- Lower the risks associated with CDs using a CD ladder where you can create different accounts with different tenures.
Apart from these, you should be aware of several drawbacks of investing in CDs before beginning with your investments.
What Are the Drawbacks Associated with Certificate of Deposit?
Similar to all investment options, CDs also have several drawbacks. Let's have a look at them to decide if you should move forward with your CD investments:
- Lower returns: Although you can get stable returns from your investments in this scheme, those are less when compared to stocks and mutual funds. Hence, it becomes imperative to diversify your portfolio to build sufficient wealth and fulfil your financial goals.
- Minimal liquidity: You cannot withdraw money from these accounts to meet your immediate fund needs. This fact can pose a hurdle when you are in dire need of money. Also, even if the banks allow withdrawing money, you must pay an extra charge.
- Inflation risks: Rising costs make it difficult to depend solely on CD investments to build wealth. So, it becomes essential to diversify your portfolio such that you can accumulate substantial wealth to stay protected from inflation. For this, you can put your money in gold and real estate.
What Is a Savings Account?
When Should Choose a Savings Account?
Are you wondering if a savings account is an appropriate investment option? Here are some of the scenarios when you can think of putting all your funds in savings accounts:
- You need continuous access to money owing to frequent transactions for a variety of purposes.
- If you anticipate a sudden need for cash to meet sudden and big-ticket expenses in the near future.
Thinking of parking all your money in this account? Here are some of the vital points you should consider when investing.
What Are the Things to Keep in Mind Before Investing in Savings Account?
Before investing in a savings account, you should consider the following pointers to make the most out of your investments:
- Make sure to put your money in a high-yielding savings account. It will help you to generate sumptuous returns on your deposits.
- Several banks claim to offer sufficient interest rates. So, it would be best to compare them across banks to choose the best option.
- Several possibilities of fraud exist with your investments. Hence, you should check the market reputation of your investor before moving ahead.
Besides these pointers, you should also have a look at its drawbacks. Doing so would help you in making a wise decision about your investments.
What Are the Drawbacks Associated with Savings Accounts?
There are multiple drawbacks of savings accounts that can hold you back when fulfilling your financial goals. These include:
- Easy to access funds: Yes! Even though many people consider this fact an advantage of accessing cash as and when required, it is also a downside. This is so because quick access to cash can turn you into an overspender, making it challenging to save money.
- Maintaining minimum balance: Irrespective of the bank you have chosen to open a savings account with, keeping a minimum balance in your account is mandatory. Otherwise, the banks will ask you to pay a penalisation amount, which might become difficult.
- Fluctuation of interest rates: The interest rates that banks offer keep fluctuating. Thus, you might receive variable interest on your deposits. This can pose a hurdle in calculating the returns beforehand and planning your financial goals based on these earnings.
Now that you know the differences between CDs vs savings accounts, it becomes easier to decide where to put your money. This will help you plan your finances as per your goals and supply you with additional; money in the form of interest. You can also receive money immediately in case of urgent requirements.
Frequently Asked Questions
Banks allow you to select tenure between three months to a year for certificates of deposits. On the contrary, a savings account has no restriction or maturity period. This ensures that you do not have to worry about your savings accounts.
Certificates of deposits usually offer a higher interest rate when compared to a savings account. Investing in CDs allows you to build wealth and keep that money safe. However, a savings account makes your money more accessible.
Both CD and savings accounts allow you to deposit money at your convenience and earn interest. Thus, they can help you build a savings habit and generate additional monthly funds.
Important Guides related to Life Insurance
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