How to combine a CD and savings account to maximize your earnings

When it comes to managing your savings, finding ways to maximize your earnings is key. One way to do this is by combining a certificate of deposit (CD) and a savings account. While these two types of accounts function differently, deciding which one to open doesn't have to be an either/or choice.

By using these two accounts in tandem, you can ensure you reach your savings goals faster while also leaving room for the unexpected, giving you the best of both worlds.

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How to combine a CD and savings account to maximize your earnings

Here's how you can combine a CD and a savings account to boost your earnings.

How CDs and savings accounts work

Before you jump into combining a CD and savings account, it's important to understand the difference between the two.

A CD is a type of deposit account that locks in your money for a specific period, usually ranging from three months to five years.  In exchange for your commitment, banks offer higher interest rates than traditional savings accounts.

The longer the term of the CD, the higher the interest rate tends to be. However, there are penalties for withdrawing funds before the maturity date, so it's important to choose a term that works for your needs.

A savings account is a more flexible option for parking your money. Unlike a CD, you have easy access to your money in a savings account. You can make deposits and withdrawals as needed without facing penalties. Savings account interest rates are typically lower than CDs, but if you choose a high-yield savings account, you can often find a rate that's comparable.

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Why you should combine a CD and savings account

There are several benefits to having both a CD and a savings account:

• You earn a higher interest rate on a portion of your savings.
• You have easy access to some of your funds if needed.
• You can lock in a high rate before rates fall.
• You can avoid penalties for withdrawing savings from a CD before the term is up.
• You can keep your savings goals organized and separate.

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How to combine a CD and savings account

So how can you maximize your earnings by using both of these account types? One strategy is to use your savings account as an emergency fund while putting the rest of your savings into a CD.

This way, you have a buffer of liquid funds for unexpected situations but still have the majority of your savings earning the higher interest rate of a CD. Choose a CD term that aligns with your savings goals, such as saving for a down payment on a house, to ensure you can afford to leave the funds untouched for the whole term.

Another option is to ladder your CDs over time. This involves opening multiple CDs with different terms —for example, a 1-year CD, a 2-year CD and a 3-year CD. When the 1-year CD matures, you can renew it at the current interest rate or choose a different term. This strategy evens out the impact of fluctuating interest rates, allowing you to potentially earn more interest with higher rates without compromising on liquidity.

It's also worth noting that some banks offer special savings account and CD packages that allow you to earn higher interest rates when you have both products with them. For example, you may be able to earn a bonus interest rate if you maintain a certain balance in your savings account and have a CD with a specific term. Check with your bank to see if they offer these types of promotions.

Of course, while the benefits of combining a CD and savings account are clear, it's important to do your research and choose the right accounts for your needs. Take into account any minimum deposits required, fees and penalties, as well as your own savings goals. Consider factors like the maturity date of your CD, the level of risk you're comfortable with, and the liquidity you need.

The bottom line

Combining a CD and savings account is a simple yet effective strategy for maximizing your savings while giving yourself easy access to your money as you need it. By using a CD to lock in a higher interest rate and a savings account for emergency funds, you can earn more interest while maintaining easy access to your money.

As with any savings plan, it's important to choose an amount that works for your budget and goals. With a little planning and commitment, you can watch your savings account grow and thrive while still giving yourself the flexibility to address financial needs as they arise.