CDs vs Online Savings Accounts: Consider Both for Your Savings

Jenius Bank Team10/4/2023 • Updated 9/20/2024

A man researching CDs and online savings accounts on a laptop.

CDs and online savings accounts may help you grow your money over time. Looking for a way to put your money to work and build your savings? There are many types of savings accounts out there but two of the most effective for growing your money are certificates of deposit (CDs) and online savings accounts.Let’s look at some of the key differences between CDs and online savings accounts and help you decide which is right for you.

Key Takeaways

Both CDs and online savings accounts earn interest on deposits.
CDs often require you to keep the money in the account for a set period, known as a term, and may charge you a penalty if you withdraw funds before the CD matures.
Online high-yield savings accounts allow you to access your money at any time, and while rates are generally higher than traditional savings accounts, they still may be lower than CDs.

Overview of Online Savings Accounts and CDs

As we mentioned, CDs and online savings accounts may help you build your savings, but one may be better suited to your saving strategy than the other. Let’s take a quick look at how they work.

Online Savings Accounts

Online savings accounts are simply a type of deposit account where you place your funds into the account and withdraw your money as needed. But, given the word “online” in the name, these accounts are typically opened and managed online. These online savings accounts function similarly to the traditional savings account at the bank down the street. Most notably, they earn interest, expressed as an Annual Percentage Yield or APY, which includes the rate itself plus the compound interest the account could earn over a year at that rate.Many online savings accounts are also called high-yield savings accounts because they offer higher than average rates. The average APY for a traditional savings account as of August 2024 was roughly 0.59% APY whereas the average APY for a high-yield online savings account was over 5.00% APY.¹ Keep in mind that saving account rates fluctuate with the market. When rates are on the rise in the economy, you may see an increase in your account’s rate too. When rate environment declines, your account’s rate may drop, too.²

Certificates of Deposit

Certificates of deposit also earn interest like savings accounts. But, unlike savings accounts, CDs typically require your full deposit upfront. Once you make the initial deposit, you usually can’t add to the balance later on.CDs also require a time commitment, known as a term. You’re expected to leave your money in the account until the CD matures. Longer-term CDs typically have higher rates than short-term CDs, but you may not find that to be true in all rate environments. In exchange for the time commitment, CDs tend to have higher rates than other savings products. Unless you have a no-penalty CD, withdrawing money from your CD before the term ends often results in a penalty. Penalty amounts vary from bank to bank, but many financial institutions set penalties as interest forfeited. For example, some banks may charge a penalty of 90 days of interest meaning you’d lose out on the last 90 days of interest accrued.³

Online Savings Accounts vs. CDs: Which Is Right for You?

Now that you understand how online savings accounts and CDs work, let’s compare the two side-by-side.

	CDs	Online Savings Accounts
Rates of Return	Typically fixed and vary depending on the term length	Variable but typically higher than traditional savings accounts
Fees	Typically none, although brokered CDs may require a management fee	Some banks charge a maintenance fee
Fund Accessibility	Often a penalty if funds are withdrawn before term ends	Withdrawals permitted at any time. Some banks restrict the number of withdrawals you may make each month
Minimum balances	Varies by CD	Varies by bank - Some banks have a minimum balance requirement or tiered rates by balance.
Deposits	One deposit to open the account. Ongoing deposits aren’t usually allowed	Allows ongoing deposits
Best Suited For	Individuals interested in long-term savings with steady rates of return	Individuals who need easy access to their money

Is It Better to Put Money in a CD or Savings Account?

There’s more than one way to build your savings and using a combination of different savings vehicles may help your money grow more over time. One of the best ways to determine whether putting your money in a CD or a high-yield savings account is the right move is to consider how much flexibility you need when it comes to the funds.For example, a CD may be a great choice if you’re saving for a major purchase, like a down payment on a house, and won’t need the money for a while. CDs offer consistent returns on your savings and make your money less accessible, so you won’t be tempted to use it on spontaneous purchases.If you’re looking for a place to store your emergency fund, an online savings account may be the better choice. Your money is accessible while still earning a higher rate than it would in a traditional savings account.It’s often best to consult a financial advisor to help you decide on a savings plan if you have questions about your specific situation.

Why Might Someone Choose an Online Savings Account Instead of a CD?

It all comes down to flexibility. Since your money is typically locked into a CD until the end of its term, you’re not able to withdraw money if you need it, without paying a penalty. With a savings account, you’re usually able to make withdrawals as needed. Keep in mind that some banks have caps on the number of withdrawals you’re able to make from your savings accounts each month.

Final Thoughts

Both CDs and online savings accounts could help you build your savings and earn interest over time. Though CDs typically offer higher rates, they also typically come with more restrictions that make accessing your money more difficult.Online savings accounts may offer similar rates and give you more flexibility for accessing funds, allowing you to use your money without worrying about penalties. If you’re looking for a flexible savings account with competitive rates, check out Jenius Bank’s savings accounts and put your money to work.

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