Why I Like Savings Accounts More Than CDs, Even Though CD Rates Are Over 5%

Sky-high interest rates on savings accounts and certificates of deposit (CDs) are one of the few upsides to the high inflation we've been dealing with over the last few years. But as inflation cools, many expect bank account interest rates to fall soon.

Some see that as a sign to stash their cash in a CD, which locks in your interest rate for months or even years. But I prefer to keep my cash in a savings account, even if I might not earn as much going forward. Here's why.

Why I prefer savings accounts to CDs

Both savings accounts and CDs pay interest on your savings, and right now, the best accounts of both types pay around 5% annual percentage yield (APY). But savings accounts and CDs have some key differences that could affect their usefulness for you.

CDs offer a guaranteed interest rate for the full CD term. This is a benefit in falling-rate environments, like the one we're expecting to see later this year. You lock in a high rate now, and you could potentially earn more over that term than you could with a savings account, which could see its interest rate fall over that time.

Say you have $10,000 and you put it in a 1-year CD with a 5% APY. Your final balance would be about $10,512. You could also put your $10,000 in a savings account with a 5% APY. But let's imagine the 5% interest rate drops after three months to 3% APY. Then, your final balance after a year would only be about $10,356 -- $156 less than you could've gotten with a CD over the same timeframe.

But savings accounts have one big advantage over CDs: accessibility. You can withdraw your savings account funds whenever you'd like, but CDs require you to leave your cash alone for the entire CD term. Early withdrawals lead to penalties equal to several months of interest payments. Though rare, it's even possible to lose some of your principal if you take money out of your CD shortly after opening it.

I prefer having easy access to my cash, especially my emergency savings. For that reason, I keep my money in a savings account, even if it means I could wind up with less interest than I'd earn with a CD. But you may want to make a different call.

Which type of account is right for you?

Whether you go with a savings account or a CD is largely down to personal preference, but there are a few times you may want to choose one over the other. Emergency savings and money you plan to spend within the next few months are best kept in a savings account. You'll be able to withdraw this money as needed without fear of any early withdrawal penalties.

CDs could be a better fit for funds you don't plan to spend for years, particularly if you want to remove the temptation to spend that cash. Knowing you could cost yourself by doing so might be the extra push you need to leave your savings alone.

No matter which account you choose, finding a competitive APY is important. But dig deeper than this. For savings accounts, check if it has maintenance fees and learn about your options for depositing and withdrawing money.

For CDs, consider the term length that you're most comfortable with. Use this to narrow your search, then focus on the banks that offer the best CD rates for those terms. If you're leery of early withdrawal penalties, you could look for a CD that doesn't have them. But these are rare, and they sometimes have lower interest rates than traditional CDs do.

It doesn't hurt to evaluate a bank's online and mobile tools as well as its customer service before opening an account. It's possible to change banks after you've opened an account, but it can be a hassle. You can save yourself a major headache by choosing your bank and account type carefully from the beginning.