Saving money is a good habit. Deciding where to put those savings can take a little more thought.
Two common choices — a certificate of deposit, or CD, and a traditional savings account — can both provide a safe place for your money. The better choice depends largely on when you expect to need it and what you are saving for.
A CD generally offers a guaranteed rate of return when money is left in the account for a specified term. Terms can range from a few months to several years. Typically, the longer the term, the higher the interest rate may be.
The trade-off is access. Money deposited in a CD is intended to remain there until the maturity date. Withdrawing it early can result in a penalty, often a percentage of the interest earned.
That makes CDs a good option for savings goals with a longer timeline. A wedding, new car, memorable vacation or even part of a future home purchase may be a good fit. CDs can also play a role in retirement planning. A CD ladder — dividing savings among several CDs with different maturity dates — can provide periodic access to funds while still earning interest.
Savings accounts offer more flexibility. You can continue adding money and generally access it when needed without waiting for a maturity date. That makes savings accounts particularly useful for emergency funds, home repairs and other expenses that may arrive without much warning.
One rule of thumb is to keep three to six months of expenses in a liquid savings account linked to your checking account. Money beyond that amount could potentially be placed in a CD if you do not expect to need it soon.
Before choosing either option, compare interest rates, fees, minimum deposit requirements and accessibility. Also consider when you will need the money.
There is no single savings option that works for every goal. The key is matching the account to the job you want your money to do — whether that means staying readily available or earning interest while you wait for the day you need it.
First Horizon Bank is a leading regional financial services company, dedicated to helping our clients, communities and associates unlock their full potential with capital and counsel. It’s the powerful tools you need with the personal service you deserve. Contact First Horizon for all your banking needs.
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