CDs vs. high-yield savings accounts: Which one is better?
During a time of inflation and market unpredictability many Americans are looking for any edge they can get. If they can simply protect the money they already have that would be great but if they could earn interest on that amount it would be even better.
Fortunately, there are two products on the market that can currently do both: protect and grow your money with interest (and compound interest if the money remains untouched).
A certificate of deposit account, also known as a CD, locks away the money you deposit into an account for a predetermined period of time. You won't be able to touch it during that time without a penalty but you'll be rewarded with a significantly higher interest rate (think 3.5 % to 4.5% or higher, compared to the 0.33% accompanying most traditional savings accounts).
High-yield savings accounts will also offer you more money via interest rates in the 3% - 4% range and you'll be able to access the account as you would most other accounts. The higher the Fed hikes rates the more you'll make.
But which one is better? CDs or high-yield savings accounts? That's what we will discuss below.
When CDs are better
Everyone's personal financial situation is different so make sure you closely look at the benefits of each of these options before signing on the dotted line. That said, here are three times when a CD may be better for you:
- When you want a fixed rate: A CD will honor the interest rate you received at the time of sign-up, regardless of any market activity during the account's lifespan. So if rates go down during that time you'll be locked in at the higher rate. Conversely, if rates go up you won't be able to take advantage (unless you open another CD at the higher rate).
- When you want to protect your money: CDs will lock away your money for the duration of your term, making it unavailable for withdrawals or deposits during that time. Because of this you can rest assured knowing that your money is protected (and growing, thanks to that interest rate).
- When you can afford it: Because CDs prohibit you from accessing the funds in the account during that time you need to make sure you can afford to part with that money for that time period. But since CD terms vary significantly (it could be months or years), many people can afford to deposit their money - and earn interest - for a short period of time without issue.
Explore your CD options online now to see how much you could be making or use the table below to get started.
When high-yield savings accounts are better
If the terms and benefits of a CD don't sound advantageous to you then consider turning to a high-yield savings account instead. Here are three times when it may be the better option:
- When you want a higher rate: Interest rates on CDs and high-yield savings accounts are currently competitive. But if you think rates could increase even further than they currently have and would like to get a higher rate then proceed with a high-yield savings account. These accounts, unlike CDs, will be responsive to the rate environment, meaning you could earn more money in the future than you may have if you locked yourself in with the interest rate presented by a CD at the time it was opened.
- When you want to use the account: CDs, as mentioned, are "set it and forget it" sort of accounts. You won't be able to access the money there until the term ends (unless you're willing to pay fees). But many high-yield savings accounts function similarly to your regular savings account. You'll even be able to get a debit card that you can use as you see fit. So, if you want the freedom to use the money in the account a high-yield is a better option for you than a CD.
- When you want flexibility: CDs can offer you protection, security and interest but they won't offer flexibility. If you're someone who wants the freedom to use their account when they want or let it sit for a time period before resuming activity then a high-yield is the better route for you. You'll have more banking freedom with a high-yield savings account versus a certificate of deposit.
Check your savings options in the table below to see what interest rate you're eligible for!
The bottom line
Both CDs and high-yield savings accounts are particularly beneficial to open in our current high-interest rate environment. Neither is better than the other as the advantages of both are specific to the individual and their financial needs and goals. Some people may prefer the locked-in interest rate and security a CD offers while others may prefer the flexibility (and potentially higher interest rate) a high-yield account can provide. Do your homework on both options and understand what you're trying to achieve before signing on the dotted line. Or split the difference and deposit amounts in both to see which one you ultimately like better.
