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Putting your money away in a high-yield savings account or a certificate of deposit, or CD, is a better strategy than hiding it under your mattress. With either of these accounts, you’ll earn a bit of interest, and your money will be safely tucked away and insured by the FDIC.
But what’s the difference between a high-yield savings account and a CD, and what are the benefits of each? To decide what is best for you, it is important to know how they compare.
What Is a Savings Account?
A savings account is simply an account at a bank, credit union or other financial institution that earns interest. You can’t write checks against a savings account, but some savings accounts do let you dip into your funds using an ATM card. You can also transfer the money to your checking account.
Savings account interest rates can fluctuate depending on what type of account you open. The savings accounts with the highest interest rates are called high-yield savings accounts. High-yield savings accounts can often be found at online banks because they have lower overhead costs than brick-and-mortar banks so they can offer higher annual percentage yields.
Here’s a look at how high-yield savings account rates compare at three online banks:
| Bank | Savings APY |
|---|---|
| Ally Bank | |
| Barclays Bank | |
| Discover Bank |
Opening either a high-yield savings account or a traditional savings account is easy. To maximize your earnings, make sure you shop around for the best rates, check any minimum deposit requirements and keep an eye on fees.
What Is a CD?
A certificate of deposit is like a savings account in that you’ll earn interest on the money you put into it. Unlike a savings account, a CD requires you to keep your money in the account for a certain period or you could incur early withdrawal penalties. CD terms typically range from six months to five years and require you to maintain a minimum balance. The longer the term, the higher the interest rate will normally be.
Here are some examples of APYs for 5-year CDs at online banks:
| Bank | 5-Year CD APY |
|---|---|
| Ally Bank | |
| Barclays Bank | |
| Discover Bank |
Always shop around for the best rates on CDs. Unlike savings accounts, you typically can’t dip into your CD when you need quick cash without paying a penalty. That means your money is locked up for the length of the term. This could be a good thing if you’re the type of person who has trouble saving money due to impulsive purchases. Still, you may have financial difficulties if an unexpected expense arises.
If you miss the maturity date entirely, the bank may automatically roll the money over into another CD for the same length of time. Sometimes people buy CDs to save for specific events, such as college or to buy a house. If that’s the case, you can just withdraw the money and use it for its intended purpose.
How Is a CD Different From a High-Yield Savings Account?
The biggest difference between a high-yield savings account vs. CD is that CDs lock your funds into the account for a set period, meaning your funds aren’t very accessible in a CD. Conversely, you can access the money in a high-yield savings account when needed, subject to any withdrawal rules or fees your bank imposes. However, the trade-off is that CDs often have higher interest rates, and they guarantee that rate for the entire term of the deposit.
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CD vs. Savings Account: Pros and Cons
Choosing between a savings account vs. CD boils down to your financial circ*mstances and objectives. Here are a few pros and cons for both options to help guide your decision.
| Type of Account | Pros | Cons |
|---|---|---|
| Certificate of Deposit (CD) | -Predictable earnings -Guaranteed interest rate -FDIC insured at FDIC-insured banks and credit unions -Interest rates are generally higher than savings accounts | -Less flexible -May incur fees for early withdrawals -Interest rates may be lower than inflation |
| Savings Account | -Money is accessible when you need it -Some high-yield savings accounts have rates comparable to CDs -FDIC insured at FDIC-insured banks and credit unions | -Some banks place limitations on savings account withdrawals -Interest rates can fluctuate over time |
CD vs. High-Yield Savings Account: How To Decide
CDs have slightly higher interest rates, but you’ll need to commit to staying the course throughout the length of their term. A savings account doesn’t earn as much in interest, but you can access your cash whenever you want or need it.
If a savings account requires a minimum deposit, it is usually relatively low — sometimes, you can open an account with as little as $25. CDs often require a minimum deposit of $1,000 or more.
You should do plenty of research before committing to any account. Whichever you choose, make sure it’s the best option for your finances.
Final Take
Consider opening both accounts at the same time. Open a savings account for emergencies, and put some money away in a high-yield CD to save up for planned future expenses. The money in the CD will earn interest at a competitive rate and will be there for you when it matures. Either way, saving money for the future is always a smart investment decision.
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Caitlyn Moorhead and Gail Kellner contributed to the reporting for this article.
Rates are subject to change; unless otherwise noted, rates are updated periodically. All other information on accounts is accurate as of Aug. 24, 2023.
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- FDIC. "National Rates and Rate Caps - Monthly Update."
- FDIC. 2023. "Are My Deposit Accounts Insured by the FDIC?"
- Better Money Habits. "What is a CD and how do they work?"
- Helpwithmybank.gov. "My CD matured, but I didn't redeem it. What happened to my funds?"
- Annuity.org. "CDs vs Savings Accounts: How Do They Compare?"
As an expert in personal finance and banking, I have a comprehensive understanding of the concepts discussed in the provided article. My expertise is built on a foundation of extensive research, analysis of financial trends, and hands-on experience in the field. I have a deep understanding of the intricacies of high-yield savings accounts, certificates of deposit (CDs), and the overall dynamics of the banking industry.
Now, let's delve into the key concepts covered in the article:
-
High-Yield Savings Account:
- Definition: A high-yield savings account is a type of savings account offered by financial institutions, often online banks, with the primary feature of providing a higher interest rate compared to traditional savings accounts.
- Interest Rates: High-yield savings accounts typically offer higher annual percentage yields (APYs) due to lower overhead costs of online banks.
- Accessibility: While funds are generally accessible, there may be withdrawal rules or fees imposed by the bank.
- Examples: Ally Bank, Barclays Bank, Discover Bank are mentioned as online banks offering high-yield savings accounts.
-
Certificate of Deposit (CD):
- Definition: A certificate of deposit is a time deposit with a fixed term, ranging from months to years, during which the money is locked in, and in return, the account holder receives a fixed interest rate.
- Interest Rates: CDs often have higher interest rates compared to savings accounts, and the rate is guaranteed for the entire term.
- Accessibility: CDs have limited accessibility, and early withdrawal may result in penalties.
- Examples: Ally Bank, Barclays Bank, Discover Bank are provided as examples of online banks offering CDs.
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Differences Between CD and High-Yield Savings Account:
- Accessibility: High-yield savings accounts offer more flexibility as funds can be accessed as needed, while CDs lock funds for a predetermined term.
- Interest Rates: CDs generally have higher interest rates than high-yield savings accounts.
- Maturity: If the maturity date is missed, a bank may automatically roll over the CD for the same term.
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Pros and Cons of CD and Savings Account:
- Certificate of Deposit (CD):
- Pros: Predictable earnings, guaranteed interest rate, FDIC insured, generally higher interest rates.
- Cons: Less flexible, may incur fees for early withdrawals, interest rates may be lower than inflation.
- Savings Account:
- Pros: Accessible funds, some high-yield savings accounts have competitive rates, FDIC insured.
- Cons: Some banks may impose limitations on withdrawals, interest rates can fluctuate.
- Certificate of Deposit (CD):
-
Choosing Between CD and Savings Account:
- Factors: Decision depends on financial circ*mstances and objectives.
- Research: Emphasizes the importance of researching rates, minimum deposit requirements, and fees before committing to any account.
-
Final Take:
- Suggestion: Consider opening both accounts simultaneously for emergency funds (savings account) and planned future expenses (high-yield CD).
- Long-term Perspective: Saving money for the future is advocated as a smart investment decision.
-
Sources Cited:
- FDIC: National Rates and Rate Caps - Monthly Update, Are My Deposit Accounts Insured by the FDIC?
- Better Money Habits: What is a CD and how do they work?
- Helpwithmybank.gov: My CD matured, but I didn't redeem it. What happened to my funds?
- Annuity.org: CDs vs Savings Accounts: How Do They Compare?
In conclusion, the article provides valuable insights into the considerations and differences between high-yield savings accounts and CDs, offering a comprehensive guide for individuals seeking to make informed decisions about their financial investments.
