Difference Between Savings, CD, and Investment Accounts

If you’re looking for a place to keep your extra cash, you have many options to choose from—including savings, certificates of deposit (CDs), and investment accounts. No matter which type of account you’re considering, it’s important to think about your timeline, goals, and risk tolerance.

What is a savings account and when does it make sense to use one?

Savings accounts are generally a safe and accessible place to keep your cash and earn interest. You can typically open an account at a bank, credit union, or other financial institution.

Savings accounts are often considered liquid accounts, as they allow you to deposit money as often as you’d like and offer a great deal of flexibility when it comes to withdrawals. Generally, you can take out money whenever you want. However, some banks may limit the number of withdrawals you can make each month as well as how much you can take out daily (e.g., ATM withdrawal limit).

Because savings accounts typically have low to no risk and are more liquid than investment accounts, they can be a great place to park your money and earn interest for short-term goals like an emergency fund or a down payment.

While traditional savings accounts usually offer a modest interest rate (often expressed as an annual percentage yield or APY), there are high-yield savings accounts that can provide a competitive rate.

Good to know: When shopping for an account, it’s important to look for an FDIC member bank, where your deposits will be insured up to the maximum allowable by law. Currently, the standard amount is $250,000 per depositor, per FDIC-insured bank, for each account ownership category.

Read more in our guide to savings accounts.

What is a CD and when does it make sense to use one?

CDs are another popular type of deposit account offered by banks, credit unions, and other financial institutions. They can be a great savings tool if you’re looking to earn a higher APY (compared to a basic savings account) on any extra cash you don’t need to use in the near term.

The tradeoff for the higher rate, however, is that your cash may be less accessible. When you open a CD, you agree to leave your money deposited with the bank for a specific time period. This is known as a CD term, and banks can offer a variety of terms and APYs for you to choose from.

At the end of the term or when your CD matures, you can expect the return of your initial deposit along with any interest earned during that period. If you wish to withdraw your money before the end of the term, you usually have to pay an early withdrawal penalty (unless it’s a no-penalty CD).

CDs could be a smart option for those looking to save for a near- or medium-term goal. This may include things like a dream vacation, home renovation, or a major purchase.

Good to know: There’s a variety of CDs to choose from and employing the right CD strategy could help you bring you one step closer to your financial goals. Read more about the different types of CDs and strategies.

What is an investment account and when does it make sense to use one?

An “investment account” is a broad term. It can include traditional brokerage accounts, which allow you to invest in stocks, bonds, and ETFs, as well as retirement accounts like IRAs or 401(k) plans.

When you invest, you take cash to buy securities or other investments with the hope of earning a return over time.

Generally speaking, investment accounts are considered less liquid than savings accounts. Certain types of investment accounts (e.g., 401(k), IRA, etc.) have strict withdrawal rules, and you may be penalized if you take money out before a set amount of time is met. This is one reason why investment accounts are typically used for long-term goals like retirement planning.

Unlike putting money in a deposit account, investing involves risk. Your portfolio can fluctuate in value depending on the markets. There are no guaranteed or predictable returns. And market volatility means your investments could make or lose money, including your principal.

That being said, while there’s a potential for losses, there’s also the possibility for gains. Historically, over the long run, financial markets have generated higher returns than interest earned in bank deposit accounts.

Good to know: A key part of investing is understanding how to properly balance risk and reward based on your risk tolerance and the time horizon over which you’re comfortable with having your money invested. That’s why it’s important to think about and understand your goals before you invest. If you’re new to investing, you may want to get in touch with a financial advisor to go over any questions you may have.

A recap

Many people often use a combination of savings, CD, and investment accounts to help them reach their goals.