High-yield savings account vs. CD: Which is right for you?

When you’re saving money, every dollar counts — including interest — so keeping your money in a safe, high-yielding account is a good way to start working toward your savings goals.

High-yield savings accounts and certificates of deposit (CDs), are two good examples. Both are savings accounts that can earn 10 times or more interest than traditional savings accounts offered by many banks. However, they differ in important ways.

With most CDs, you agree to leave your money in the account untouched for a set period, called its term. You'll be penalized if you take money out before the end of the term. A high-yield savings account allows you to withdraw your money at any time.

So which one is a better place to park your cash? That depends on current interest rates, when you need the money, how you want to spend the money, and your saving goals. Read on to decide whether a high-yield savings account or CD is better for you.

How does a high-yield savings account work?

A high-yield savings account, also called a high-interest savings account, offers an interest rate significantly higher than a traditional savings account. Typically, online banks provide high-interest savings accounts with the best rates, meaning in-person banking likely won’t be an option. However, many online banks offer ATM access, mobile app deposits, and the ability to link an outside checking or savings account to your high-yield savings account for transfers.

Like traditional savings accounts, high-yield savings accounts have a variable rate of return, usually shown as an annual percentage yield, or APY, that banks and credit unions raise and lower as market rates and economic conditions change.

How does a CD work?

CDs are savings accounts with term lengths ranging from a few months to several years. In exchange for earning a high APY, you agree to leave your money in the account for the length of the term. If you withdraw your money before the term is up, you’ll likely be charged a penalty such as forfeiting a portion of the interest you’ve earned. Some banks offer no-penalty CDs, usually with lower APYs.

APYs on longer-term CDs tend to be higher — up to a point. Currently, CD rates rise consistently until 12 months, after which rates fall slightly. A regular CD’s APY stays the same for its entire term. That’s good news if interest rates drop or stay about the same after you open the account. It can be less positive if interest rates increase significantly before the CD matures since you may miss out on the higher rate.

When your CD reaches maturity — its term ends — you’ll have a grace period of a week or two, depending on the bank to decide what to do with the money in the account. You can withdraw it or add it to another CD. If you don’t act, the bank will often automatically renew your CD for the same or a similar term length. To understand your options when your CD matures, be sure to read the terms of the account when you open it.

High-yield savings account vs. CD: Which is better?

Whether a high-interest savings account or a CD is a better choice depends on your financial goals. A high-yield savings account is likely a better choice for building an emergency fund because you can add and withdraw money regularly. With most CDs, you can only add money when you open it and the grace period after it matures.

A CD is a good option for fixed savings goals such as money you've set aside for a car or a down payment on a house. Let’s say you don’t plan on starting your house shopping for a year. You could put your down payment money in a CD with a year-long term and let it earn interest until you need the funds.

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