CDs vs. high-yield savings accounts: Which is better in today's rate environment?
The Federal Reserve's campaign to curb inflation by raising interest rates has made it challenging for homebuyers to take out an affordable mortgage. Similarly, higher interest rates have made other types of loans and credit cards more expensive.
But the interest rate news isn't all bad. These elevated rates could mean it's an opportune time to earn money with certificates of deposit (CDs) and high-yield savings accounts.
But which option is better in today's rate environment? Both options deliver unique benefits, so deciding which is best for you will ultimately be a personal decision based on which suits your needs best. Below, we'll break down what you need to know about CDs versus high-yield savings accounts and when you might consider each option.
CDs vs. high-yield savings accounts: Which is better in today's rate environment?
Trying to determine which account is better for you now depends on a series of factors. Here's what to take into consideration:
Why a high-yield savings account may be better in today's rate environment
As its name suggests, a high-yield savings account offers significantly higher interest rates than standard savings accounts found at traditional brick-and-mortar banks. According to recent data from the Federal Deposit Insurance Corporation (FDIC), savings accounts currently offer average yields of 0.45%, but this paltry figure doesn't include high-yield savings accounts. You can find high-yield savings accounts from credit unions and online banks with rates ranging from 4.30% to 5.05%.
"All savers should have a high-yield savings account for emergency funds and short-term goals and expenses," says Ken Tumin, founder and editor of DepositAccounts.com. "High-yield savings accounts, which are typically online savings accounts, are especially useful in an elevated rate environment, like today, since their yields are so much higher than yields of traditional savings accounts."
High-yield savings accounts are popular savings options for short-term savings goals like a vacation, a wedding or a down payment on a car. You'll earn a better return than a standard savings account but without the risks that come with the stock market or other investments.
Explore your high-yield savings account options here today.
Why a CD may be better in today's rate environment
CDs usually pay higher interest rates than traditional and high-yield savings accounts, with one caveat. You must agree to lock your money in the CD account for a specific term, typically between three months and five years. If you withdraw funds before your CD's maturity date, you'll likely incur an early withdrawal fee, usually a portion of the account's earned interest.
CDs are a great option when interest rates are high, as they are in the current interest rate environment. As Stephen Nixon, product management director of consumer savings products at Wells Fargo, notes, "Now is a good time to invest in CDs. As interest rates rise, fixed interest rates paid on CDs also typically increase."
Currently, the best CD rates exceed 5% APY for CDs up to three years. Longer term four- and five-year CD rates tend to range between 4% and 5%.
One effective savings strategy is to align your CD term with a specific goal. For example, if you're saving for a home down payment with a two-year horizon, you could earn a fixed rate with a 24-month CD, which could potentially perform better than a variable rate high-yield savings account.
Like high-yield savings accounts, the funds in your CD are protected with federal deposit insurance. "I prefer the portfolio of CDs versus high-yield savings to account for better FDIC coverage," says Judi Leahy, senior wealth advisor at Citi Personal Wealth Management. "Each account owner has a maximum of $250,000 per issuing institution."
Explore your CD account options online now.
Other savings options
While CDs and high-yield savings accounts provide a safe place to stash your money while earning higher rates, they're not your only option. Before proceeding, it's wise to explore all possibilities, including
- Money market accounts: Money market accounts (MMAs) typically offer higher interest rates than regular savings accounts, and many provide the ability to write checks and use a debit card.
- Money market funds: Money market funds are mutual funds that invest in short-term, low-risk securities. Some money market funds are currently paying yields over 5%, but rates may fluctuate. However, these funds are not without risk, as they are not FDIC or NCUA insured.
- Treasury securities: These securities are generally seen as safe investments as they are backed by the full faith and credit of the U.S. government. U.S. Treasury securities range from short-term Treasury bills to longer-term Treasury bonds.
- IRAs or 401(k) retirement accounts: These tax-advantaged retirement accounts can help you save for your golden years. And with 401(k)s, your employer may contribute matching funds to boost your savings.
The bottom line
In the current high-interest rate environment, both CDs and high-yield savings accounts can benefit you with higher yields. Deciding which option is best is a personal decision that should account for your financial needs and goals. If you don't need access to your funds, a CD may be an excellent way to lock in a high rate for a longer term, especially if you anticipate interest rates declining.
On the other hand, if you want the flexibility to access your cash if needed, a high-yield savings account also provides high APYs without locking up your funds. Consider consulting with your financial advisor or tax accountant before making a final decision. Explore today's top CD and high-yield savings accounts here now.
