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Difference Between Savings Accounts, CDs and Investment Accounts: What You Can Use and When

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What we’ll cover: 

  • Savings accounts can give you at least some earning potential with interest in addition to a relatively safe place to park your cash. 
  • CDs provide an interest rate premium in exchange for locking up your money for a set period of time.
  • Investment accounts could give you a higher rate of return of the three, but often with greater risk of losing your money.

These days if you’re looking for a place to stash your extra funds, you have a lot of options. (And if you’re thinking about under your mattress, it might be time to reconsider.) In this article we’ll go over three financial vehicles that can hold onto your funds: savings accounts, CDs and investment accounts. In an ideal world (without risk or volatility), all these vehicles can make your money work for you.

So how do you decide which one to choose? Thankfully, that doesn’t have to be a convoluted process. Two considerations can help you figure out where to park your funds: your timeline (when you might need your money) and your goals. In some cases, especially when we get to investment accounts, considering your risk tolerance can be helpful, too.

Ahead, we’ll go over the specifics of savings accounts, CDs and investments accounts and when you might consider each one. Let’s dive in!

What’s a savings account and when can it make sense to use one?

We’ll venture to say that you know what a savings account is. But we’ll go over the basics just so you can compare its features with the other financial vehicles we’re reviewing. Basically, a savings account is a deposit account that earns interest and is held at a bank or other financial institution (including online banks). 

Savings accounts are typically considered a safe and reliable option. They’re usually federally insured (meaning deposits, within coverage limits, are protected against bank failure) so, depending on the balance per account, there’s little to no risk associated with keeping your money in a savings account. The tradeoff, however, is you’re generally not going to see crazy high returns.

The two main things to consider when thinking about where to put your money: how soon you’ll need that money and what your goal with it is.

That’s because the interest rate on savings accounts is typically pretty modest. Of the three financial vehicles we’re discussing, savings accounts usually have the lowest interest rate. For the week of March 8th, 2021, the FDIC listed the national interest rate for savings accounts at 0.4% and a rate cap at 0.79%.

Now that’s not to say traditional savings accounts aren’t worth it. When you’re thinking about where to put your money (whether that’s a savings account or elsewhere), the two main things to consider: how soon you’ll need that money and what your goal with it is. (Yes, we’re really driving this point home!)  

Money in a savings account is typically easier to withdraw from than CDs. So you might choose it for funds that may be needed soon or quickly. Think: an emergency fund for unexpected financial surprises or money that you’ll want to access in a few months for short-term goals, like buying a car. So compared to CDs and investment accounts, your money is still generally easier to take out.

Note: In this article, we’re only touching on traditional savings accounts. However, there are also high-yield savings accounts designed to, you guessed it, provide higher yields, aka more interest. You can learn more about high-yield savings accounts here

What’s a CD and when can it make sense to use one? 

Like a savings account, you can find a CD (Certificate of Deposit) at banks and other financial institutions. CDs may offer a potentially higher interest rate. But you may have to keep a lump-sum deposit in the CD for a designated amount of time, called a “term.” (Note: some CDs allow you to continue adding money during the term, but traditional CDs usually don’t let you add funds after your initial deposit. So be sure to check the terms of your CD).

All CDs come with a term, which is the length of time you agree to lock up your money in exchange for a specified interest rate. The terms for CDs differ – they can be as short as three to six months or longer, like from 12-18 months. Typically, the longer the term, the higher the interest rate you can earn. CDs are similar to savings accounts in that they are typically safe because they’re federally insured (again, up to a limit).

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Reaching your goal starts with saving for it.

The main difference between savings accounts and CDs? It comes back to the term. Unlike traditional savings accounts where you can make withdrawals typically around six times a month, with CDs you usually can’t withdraw the funds until the term is up. If you do, you might pay a penalty. 

Because of their features, CDs can make sense if you have specific financial goals in mind that line up with a CD term length. For example, if you’re saving up for a car in the next 12 months, a 12-month CD could help you earn a little extra interest during that time.

Good to know: Not all CDs are strict with withdrawals. No-Penalty CDs let you take out money whenever you want without incurring a penalty fee. (If that sounds up your alley, take a look at our comparison of No-Penalty CDs to Online Savings Accounts.)

What’s an investment account and when can it make sense to use one?

Investment account is a pretty broad term – it can include traditional brokerage accounts which allow you to invest in stocksbondsETFs or mutual funds. Retirement accounts, like IRAs or 401ks, are also considered investment accounts. 

Your contributions, gains and withdrawals might get taxed differently depending on which investment account you have.

Which one (or ones) you pick will likely depend on factors we mentioned above, like your timeline and goals. For example, you might go with an IRA for retirement, or a mutual fund or ETF if you’re looking for easy diversification.

The potential for a higher return also comes with more risk and more volatility – so you might see your balance fluctuate day to day

With investment accounts, you’ll also want to think about your risk tolerance. If we use the returns of the S&P 500 (from its inception in 1926 to 2018) as an example, investment accounts typically have a higher rate of return than with the interest earned on a savings account or CD.

However, the potential for a higher return also comes with more risk and more volatility – so you might see your balance fluctuate day to day, and there’s also the potential to lose your money. This is why you’ll probably want a longer timeline if you’re thinking about an investment account (meaning you don’t need access to the money for some time), in order to potentially give the market enough time to recover from losses.  

Now that we’ve covered savings accounts, CDs and investment accounts in a little more depth, here’s a handy table to check out which account type might make sense for you based on timeline and example goals!

Savings Account

CD (Certificate of Deposit)

Investment Account

Timeline

Short-term: immediate needs - less than 3 years

Intermediate: 3-10 years (can be less depending on the rate and term you desire) 

Long-term:  10 years and beyond

Types of Goals

Emergency fund, buying a car

Buying a house, home renovations

Retirement, saving for kids’ college fund

Bottom line: No matter what goals you’re saving towards or what your timeline might look like, there’s an account type that can potentially help you earn more money (sometimes accompanied by the risk of losing that money, as well). So instead of letting it sit under your mattress or stashing it in an old coffee can, put those funds to work!

This article is for informational purposes only and shall not constitute an offer, solicitation, or recommendation to buy or sell securities, or of an account type, securities transaction, or investment strategy. This article was prepared by and approved by Marcus by Goldman Sachs®, but is not a description of any of the products or services offered by and does not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates, subsidiaries or divisions. Goldman Sachs Bank USA and Goldman Sachs & Co. LLC are not providing any financial, economic, legal, accounting, tax or other recommendation in this article and it is not a substitute for individualized professional advice. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.  Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA, Goldman Sachs & Co. LLC are or any of their affiliates, none of which are a fiduciary with respect to any person or plan by reason of providing the material or content herein. Neither Goldman Sachs Bank USA, Goldman Sachs & Co. LLC nor any of their affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.

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