Savings Accounts vs. Certificates of Deposit (CD’s)
Certificates of Deposit (CD's) represent a good option to money market accounts and savings account. CD's share almost the same characteristics as savings accounts, but they usually pay higher interest than them.
CD's vs. Savings Accounts
Even though CD's and savings accounts share some similar traits, they differ in some aspects. Namely, the interest rate that is paid on savings accounts is usually lower than on CD's.
Another difference is that when you invest in a CD you make the commitment that you will keep the money in it for a particular time period. Otherwise, you have to pay a penalty on the premature withdrawals you make from the account. Thus, you have to invest in a CD money that you know you will not need during this particular time.
Additionally, you should determine whether the interest you will receive is worth keeping the money in the CD. Depending on the length of time for which you will place the money in a CD, the bank will offer you different terms.
The Federal Deposit Insurance Corporation (FDIC) is the institution responsible for the protection of the issued by banks CD's. Thus, if the banking system collapses, which is very unlikely, your money enjoys a certain degree of protection.
Both savings accounts and CD's can benefit from the so called compounded interest. This means that when you earn interest, it is added to your account. The next interest you get is on the principal plus the interest from the previous month. So, what actually happens is the earning of an interest from interest.
In order to decide whether to invest in a savings account or a CD you should take into consideration two factors: your need for quick access to your funds and the return you are after.
If you have money you can afford to invest and you know you will not need it in the near future, then it is better to invest in a CD than in a savings account since generally savings accounts pay less interest than CD's.
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