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Checking accounts are great places for managing your spending, but not the best for saving money — they earn little to no interest.
A CD could be a better option than a checking account if you'd like to earn interest on your cash, particularly if you can keep your money untouched for a certain period of time. The best online banks and credit unions have accounts paying 5.00% or more right now.
We've calculated how much money you'd earn with an account paying 5.00% in comparison to a checking account that doesn't earn interest. This may help you make a decision about where to store your money.
For our examples, we're looking at CDs specifically because select financial institutions have CDs paying 5.00% or more right now.
It's important to know that CDs have fixed interest rates, which means your rate will stay the same for the entire term. In comparison high-yield savings accounts and money market accounts have variable interest rates, which means the rates may change at any time.
To figure out how much money you would earn on an account, we're using the formula for compound interest:
Note: APY (Annual Percentage Yield) is different from the interest rate on an account. APY is what you'll earn in one year, and takes into consideration how frequently interest is compounded. The interest rate doesn't include compound interest.
The interest rate might be lower than the APY depending on the impact of compound interest. For example, if interest is compounded daily, you might have an account that pays 5.00% APY and has an interest rate of 4.88%. Some financial institutions include both the APY and interest rate on their rate sheets.
First, let's look at what would happen if you deposited money into a 12-month CD that has 5.00% APY and an interest rate of 4.88%, which compounds interest daily.
The chart below highlights how much more you would earn on the 1-year CD over a checking account that doesn't pay interest. The values are rounded to the nearest dollar.
|Minimum deposit||Checking account balance after 12 months||CD balance after 12 months||Difference between accounts|
Now we're going to look at what would happen if you deposited money into an 18-month CD that has 5.00% APY and an interest rate of 4.88%, compounded daily.
|Minimum deposit||Checking account balance after 18 months||CD balance after 18 months||Difference between accounts|
Before you move money into a CD, you'll want to evaluate whether this account is truly the best fit for your savings goals. While CDs do not have monthly fees, there are early withdrawal penalties if you withdraw money from an account before the end of its term.
Anna N'Jie-Konte, a CFP and the founder of Dare to Dream Financial Planning, wrote a step-by-step process for Insider that you can use to determine if a CD is right for you. Essentially, you'll want to see if your goal has a clear timeline and consider whether a goal could be achieved more quickly if your money was in another type of account.
In all, CDs offer much more competitive rates than standard checking accounts, and could be a great way to earn more interest on your money. However, before you settle with a CD, review different types of savings accounts to confirm that it's the best option for you.