Navigating the Differences Between a Savings Account and CD

The thought of saving money seems like a daunting task to some. Other people view the thought of saving as a task that need not be done until “later” in life when you are thinking about retirement. However, saving money is a good habit to start young regardless of whether one wants to end up “rich” in life or just financially secure (read: not having to live paycheck by paycheck).

The most basic account possibility for saving is to open a basic savings account, but always be aware of the fine print. Make sure to read what you are getting into before actually opening the account.

In some cases, a bank may charge you a certain monthly fee if your savings account dips under a minimum balance amount (which is set by the bank).

At the same time however, banks such as Washington Mutual will waive that monthly fee if you set up the direct deposit account feature which takes money out of your checking account to be placed into your savings account.

In general, the direct deposit option is a good feature to use making the process of saving money a little more bearable and also more consistent. This of course, translates into greater savings for you in the future.

Savings accounts tend to have lower interest rates than most other types of accounts that can be opened through banks or investing institutions. This lower rate is due to the fact that people can access their money at any time. If someone wants to withdraw an amount from their savings account and put it in their checking account, they can do so.

However, if you are in the market to earn more competitive interest rates, one possible option is opening a certificate of deposit (known as a CD). These types of accounts work the same as a savings account in that they earn interest on a monthly basis. The difference between a CD and regular savings account is that the money in a CD cannot be withdrawn until after the term on the CD is over.

Should someone decide to withdraw money from a CD before the term is up, they will be penalized and will usually have to pay a fee or lose a percentage of the interest they have already earned on their CD account.

Terms on CDs vary with each institution. Some banks have CDs with five or 10-year terms attached to them. Other institutions have CDs with shorter terms such as six months.

CD’s tend to have higher interest rates because of this little factor. If you know you have some money that you do not foresee using in the near future, then a CD is a good option for you.

Online banking institutions such as ING are a great starting point for beginning investors. Not only does the web site offer very useful information, but ING has some of the most competitive interest rates on their CDs in the nation.

In addition, you do not need to put in a minimum amount of money to open your CD.

Some banking institutions will advertise higher rates on their certificates of deposit, but a closer look at the fine print will often expose the truth: customers must put in a minimum amount, which is usually $5,000-$10,000. If you’re just in the beginning stages of saving, chances are you don’t have that kind of money.

So, start out small. Open an account where there is no minimum and earn interest there rather than letting your money sit in a checking account not doing anything for you. Once you have a larger amount of money, you can move the money to another financial institution offering higher rates, and watch your savings grow.

Reference:

• For information about opening a savings account or CD, start with www.ingdirect.com. You can also try Charles Schwab at www.schwab.com. For basic tips on managing your money and saving, also try the online version of Young Money magazine at www.youngmoney.com. The web site features several great tips for saving and also teaches the basics about savings accounts.