CDs Versus High-Yield-Savings Accounts— Which is Best for You?
When it comes between CDs and high-yield savings accounts, which one to choose? We'll show you how.
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You've probably come across headlines and tidbits of advice on why now is a great time to stash your cash in high-yield savings accounts —we're talking over 5% interest rates.
High-yield savings accounts, essentially savings accounts that reward you by growing your money faster than traditional savings accounts, can be a safe, steady way to earn interest.
But how do they fare against CDs, or certificates of deposits? We'll take a look at the differences and similarities between the two, pluses and minus, and which one might be a better fit for you:
CDs versus high-yield savings accounts
First, we'll go over the main differences between the two. High-yield savings accounts are a type of deposit account that offers savings rates that are higher than your standard savings account. Currently, the average interest rate for savings accounts in the U.S. hovers at a 0.45% interest rate. The rate for a high-yield savings account varies but can be as high as 5.40%.
On the other hand, CDs or certificates of deposit are deposit accounts where you agree to lock in your funds for a set amount of time. In return, you can enjoy higher-than-average interest rates. Once the term of the CD ends or the CD matures, you can either take the money out or roll it into another CD.
High-Yield Savings Accounts (HYSAs): Pros and Cons
Now that we've gone over the basics of HYSAs, we'll go over their advantages and drawbacks.
Pros
- Higher than average interest rates for savings accounts. You can typically earn more than if you socked away the funds in a standard account.
- Money is protected. Savings accounts are FDIC-insured. Your money is backed by $250,000 per depositor, ownership category, and financial institution.
- Low risk. You are guaranteed to grow your savings and earn money on the interest. They're more safe than other investments.
- Flexible access. In other words, you can take money in and out at any time. There aren't any fees or taxes for doing so.
Cons
- Might earn more in other ways. You might be able to make more on the funds through other means, for instance, by investing in the stock market.
- Limited number of transfers and withdrawals. Banks can limit the number of transfers and withdrawals with your savings account in a given month.
- Banks might charge fees. If not careful, monthly account fees, overdraft and non-sufficient funds fees, and other charges could eat up some of your savings.
- Minimum opening requirements and account balances. Some financial institutions might require you to open an account with a minimum balance or maintain a certain amount.
Certificates of Deposits (CDs): Pros and Cons
Next, we'll look at the pluses and minuses of CDs:
Pros
- It might offer higher rates than high-yield savings accounts. Depending on the CD term, you might get a higher rate on a CD than the other types of accounts.
- Money is protected. Because CDs are a type of deposit account, your funds are backed by the FDIC. You're covered up to $250,000 per depositor, per ownership category, per bank.
- Low risk. Unlike other investments, like putting your money in the stock market, you're guaranteed to earn cash at the promoted interest rate when you open your CD.
- CD ladder strategies can give you greater access to your funds. To get the best of both worlds—access to your funds and higher earnings—you can ladder your CDs. With this approach, you put money in different CDs with varying maturity dates (i.e., three months, six months, nine months, 12 months). That way, you can tap into some of that money every three months as needed.
Cons
- Money is locked into your account. A major disadvantage of a CD is that you can't touch your funds until
- Could be missing out on greater savings rates. Because your money is locked into a CD at the same interest rate, you could miss out on greater earnings by putting your money into a savings vehicle with a higher APY. This includes if the CD you opened at a bank increases the interest rates on the same CD term.
- Early withdrawal penalties. Should you need to tap into the funds in your CDs before the CD matures, you usually will get hit with an early withdrawal penalty. This is typically a percentage of the interest earned.
How to decide which is best for you
So, which option is the right fit for your short-term goals? Here are a few things to mull over:
What are your short-term goals? It could be helpful to jot down your near-future goals, typically financial goals, in the next year, for instance: a summer vacation, a new computer, or a down payment for a home. Next, how much do you need, by when? Pinpointing the exact target dates and amounts can help you make a clear choice—and how much to put away.
Do you need to access the money now? If it's for an emergency fund and you need to tap into your funds at any time, then a high-yield savings account would probably be the better choice. A CD might be a good fit if you don't anticipate needing the funds shortly.
Do you already have a savings account? If you have some money set for a rainy-day fund, you might feel more comfortable locking your cash into a CD.
While both are attractive options, understanding the differences between CDs and high-yield savings accounts, their respective pros and cons, and knowing what to consider can help you choose the best choice for you.
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Jackie Lam is a personal finance writer whose work has appeared in Salon, Business Insider, and GOOD.