The saver's guide to choosing between a CD and a savings account

Ask any financial advisor, and they'll gladly tell you the point of a budget is to help you manage your spending. That way, you're able to save money to help you reach your financial goals.

Ideally, at least 15% to 20% of your budget is allocated for savings. Maybe your short- and long-term savings goals include things like a car, your kids' education, a house, retirement, or even next summer's trip to Disney World®. You probably also want to have an emergency fund of at least $1,000 or a few months of expenses.

Regardless of your goals, where you stash your cash matters. Your money can work for you if you put it in the right place. Savings accounts and certificates of deposit, or CDs, are two options you can use to earn interest on your money. Read on for advice on choosing between a savings account and a CD.

What is a savings account?

A savings account lets you earn interest while your money is kept in the bank.

You can add money to your savings account anytime through a regular deposit from your paycheck or a lump sum. While you can withdraw your money at any time, it lacks the convenience of a checking account for everyday transactions.

Why is it better to put your money in a savings account rather than just keeping it in your checking account? With a savings account, you can typically earn more interest. And don't forget, your interest earns interest too, compounding the money you make from your savings.

The amount of interest earned by a savings account can depend on a few factors: type of savings account, amount of money kept in it, prevailing interest rates and the institution.

Most banks offer different types of savings accounts.

• If you're just starting, you might choose an account that only requires a small initial deposit. For example, a USAA Savings account requires a minimum opening deposit of $25.
• If you have a larger chunk of money, you may choose an account with a higher interest rate. Our USAA Performance First® savings account requires $10,000 to open, but its annual percentage yield, or APY, is typically higher compared to the USAA Savings account's.

Savings accounts' variable APYs aren't set in stone. They can change based on factors like the interest rates set by the Federal Reserve.

What is a CD?

Like a savings account, a CD is a low-risk way to earn interest on cash. Unlike a savings account, you have to agree to leave a lump-sum deposit for a predetermined amount of time. USAA Federal Savings Bank offers traditional CDs for as little as 30 days or as long as seven years.

With a CD, the interest rate is typically fixed, but there are variable rate and adjustable-rate CDs too.

To decide if a CD makes sense for you, ask yourself when you'll need your money.

Let's say you're planning to buy a home in five years, and you've already saved $5,000 toward a down payment. You could put that money in a savings account, or you could buy a CD with a five-year term that typically allows you to lock in a higher rate.

Here's the thing about CDs: To get the full benefit, you need to leave your money in for the full amount of time. You get your money back, including the earned interest, when the set term ends. There may be options for exiting early if there's an emergency or change in your situation. Keep in mind, there's usually a penalty for early withdrawals.

Once your CD reaches its maturity date, most banks have a short grace period during which you can decide to change the term of your CD, add or reduce funds, close the account, or renew with the same term, though it will be at the rate in effect at that time.

Savings accounts versus CDs: Which account is right for you?

If your savings goals have an uncertain time frame, a savings account may be a better choice. Maybe you're saving for a car, and you'll need the money whenever your current car refuses to crank. Or maybe you're saving for vacation, but your travel plans are uncertain.

Your emergency fund falls into the same category. This fund, which is the money you've saved for unexpected expenses, ideally equals about three to six months' worth of your living expenses. Since you don't know when you'll need the money, keeping your emergency fund in a savings account allows it to stay available.

Another option for those with a fully funded emergency fund might be to keep some in savings and some in a CD to earn more interest.

On the other hand, if you know what you're saving for, as well as when you'll need to access that savings, a CD could be a smart move. For people who are risk averse, a CD may be a better alternative than putting your money under your mattress or in a regular savings account.

In addition to saving for a future home, CD-friendly savings goals could include a new car you want to buy in two years or a vacation to celebrate a future anniversary.

Are CDs riskier than investing in the market?

Fixed-rate CDs are considered less risky than investing because they offer a guaranteed interest rate. While the amount you deposit into a CD is generally not at risk, CDs usually don't have the same earning potential that comes with investing.

The amount they earn depends on the prevailing interest rate. Even when interest rates are attractive, if you're saving for a longer-term goal like retirement, investing will most likely give you a greater opportunity for your money to grow. Check out these five steps to help you decide between saving or investing.

CDs aren't without risk. They're still subject to inflation, liquidity or interest-rate risks.

You can lessen that risk by owning more than one CD at a time or a CD ladder. A CD ladder spreads your funds over a number of CDs. Each of these CDs has a staggered maturity date, so you get the highest rate offered every time your accounts mature.

If interest rates go up, you'll have cash to open new CDs, and if rates go down, you'll still have money growing in your higher-interest-rate accounts. A CD ladder also gives you periodic access to some of your funds, which can help you avoid early withdrawal penalties.

How important are interest rates?

The interest rate environment plays a big factor in considering a savings account versus a CD — or even a CD ladder strategy. When rates are low, the difference may not be worth locking your money into a CD. But when rates are attractive, CDs can present an opportunity for more growth.

The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.