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Term Accounts or Savings Accounts: Which is Best for You?

Both help your money grow and offer a wide range of benefits to savers.

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Are you looking for a safe and reliable way to reach financial goals like buying a home, taking a dream vacation or helping your child pay for his or her college tuition? If so, check out the benefits of federally insured savings and term (similar to CDs) accounts. Both help your money grow over time and each offers a wide range of unique benefits to savers.

Term (Similar to a CD) and savings accounts: What is the difference?

When comparing term and savings accounts, it helps to understand their differences by looking at factors including:

  • Accessibility of funds: With a savings account, your funds are liquid, meaning you have fast and flexible access to cash, whenever you need it. It’s important to note that withdrawals are limited to six times per month, per savings account, per Federal Regulation D (Note: Regulation D has currently been suspended, so limitations no longer apply). However, with term accounts, you invest a specific amount of cash, for a particular period ranging from a few months up to five years or more. If you withdraw these funds before the end of this maturity period, you will pay penalties up to several months’ of accumulated dividends (interest).
  • Interest rates: Financial institutions set and adjust the interest rate in savings accounts over time as the federal funds rate rises and falls. However, term accounts allow investors to lock in a fixed rate of return for a specific period (or the term) of the account. Generally, the longer the term and the larger your investment, the higher the interest rate you can secure upfront. (See how your initial investment in a term account can mature over time using our online calculator.)
  • Initial deposit: Most financial institutions offer savings accounts with a minimal (under $100) initial deposit. Term accounts, on the other hand, often require initial funding in the neighborhood of several hundred or thousands of dollars.
  • Account fees: Savings accounts rarely include maintenance fees (and if they do, they’re often avoidable if you use them as designed). Similarly, account fees for term accounts are not common. (However, don’t forget that you will pay a fee, or penalty, to withdraw funds from your term account before the end of the pre-agreed upon maturity period.)
  • Adding funds: Savings accounts allow you to add funds at your discretion. This feature is especially useful if you wish to set up automatic deposits into the account each month (a great way to put your savings on autopilot). Term accounts, however, rarely offer consumers the ability to add additional funds. You add the required funds upfront, and then stand on the sidelines to watch them grow until the maturity date arrives, at which point you can either cash them in or roll over your funds to a new term account.

Which account is best for your needs: savings or term?

Term and savings accounts each include a wide range of unique advantages to savers. However, depending on your specific financial situation and goals, one may be better suited for your needs.

Which scenario below best describes your situation?

  • You need an easily accessible account to handle emergencies: Are you looking for an account to hold your rainy day fund? If this is the case, a savings account is probably the right choice for you. Remember, you cannot access the funds in a term account without forfeiting several months of accumulated interest.
  • You want to invest in long-term financial growth: Can you afford to deposit your money and not touch it for an extended period? If so, a term account may be your best option. Consumers typically earn higher interest rates on term accounts than savings accounts because they obligate the funds in a term account to a financial institution for a specific period.
  • You need some discipline in your financial life: Do you tend to dip into your financial accounts each month unnecessarily? If so, a term savings account may be an attractive option to enforce discipline and remove your temptation to overspend since you know you’ll incur a penalty for withdrawing them.
  • You want maximum growth for your money: Since interest rates fluctuate over time, both a savings account and a term account could meet your needs in this scenario. If you lock in a high rate for a term account today, and interest rates fall in the future, you will benefit from having set up an account at a higher rate. However, if you lock in an attractive rate based on today’s interest rates and then they subsequently rise, you may miss out on interest you could have earned.

Ultimately, term accounts and savings accounts both offer safe, reliable and federally insured opportunities to grow money over time. However, based on your specific needs and future financial goals, one may be the better option. As with any financial strategy, do your homework and develop a strategy that works for you.

Looking for a savings option that lets you lock in a high APY? Check out our top-of-market term savings accounts (similar to CDs).

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CUNA 2023 diamond award trophy icon

CUNA 2023 Diamond Award Winner

Financial Education

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