When it comes to ensuring your money is safe and fairly liquid, bank accounts are your best bet. Several types, such as a certificate of deposit (CD) and high-yield savings account, offer other benefits, such as higher interest rates than traditional savings accounts.
When it comes to ensuring your money is safe and fairly liquid, bank accounts are your best bet. Several types, such as a certificate of deposit (CD) and high-yield savings account, offer other benefits, such as higher interest rates than traditional savings accounts. However, there are differences between CDs and high yield savings accounts — one being how often you can access your cash.
What is a high-yield savings account?
A high-yield savings account is a type of deposit account that offers much higher interest rates (called annual percentage yield, or APY) compared to traditional savings accounts. In many cases, high yield savings account interest rates are at least ten times what you would get with a regular savings account — in some cases upwards of 5%. While you won’t earn as much compared to investing accounts, for instance, it’s much better than letting your nest egg sit there and lose money to inflation.
Aside from the better interest rates, high-yield savings accounts operate similarly to traditional savings accounts. You can deposit money as frequently as you’d like, and your account is insured by the FDIC up to $250,000 per depositor. Though you probably won’t have access to a debit card or checks, you can make online or ACH transfers to and from your account. You can also withdraw your money as many times as you want, though depending on your bank, there may be monthly limits, after which you’ll have to pay a fee.
Here are a few savings accounts earning 5% APY or higher right now:
- CFG Bank: 5.12% APY
- Total Direct Bank: 5.07% APY
- Salem Five Direct: 5.01% APY
- Dollar Savings Direct: 5.0% APY
- My Banking Direct: 5.0% APY
- Newtek Bank: 5.0% APY
- Popular Direct: 5.0% APY
What is a CD?
A certificate of deposit, or CD, is another type of deposit account that helps you earn more interest. Right now, the average interest rate among the top 1% of CDs is 5.44%, according to DepositAccounts.com. CDs are time bound accounts, which means that you make a one-time deposit and then agree to keep your money in the account for a predetermined amount of time (also known as the term). Terms generally range from three months to five years, and you earn a fixed interest rate for the entire duration.
Once your CD reaches the maturity date (the end of the term), you can withdraw the cash, renew the CD at the current rate, or roll it over into a new CD. While it’s possible to withdraw money from your CD early, you would have to pay an early withdrawal penalty. The amount of the penalty is typically based on how much interest you’ve earned from your CD so far.
Here are a few one-year CDs offering 5% APY or higher right now:
- Bread Savings: 5.35% APY
- Popular Direct: 5.35% APY
- BMO Alto: 5.25% APY
- Alliant Credit Union: 5.0% APY
Other CDs to consider:
High-yield savings account vs. CD
While both high-yield savings accounts and CDs offer better interest rates than many other types of bank accounts, there are several differences between the two:
- Flexibility: Savings accounts offer a bit more flexibility since you can make withdrawals and deposits almost any time. CDs, on the other hand, won’t allow you to deposit more money after you open the account. You will also need to agree to keep your deposit in the CD for a certain period of time. While you can technically withdraw money from your CD before it matures, you could have to pay a penalty.
- Fees: You won’t generally have to pay a monthly maintenance fee on either high-yield savings accounts or CDs, though you may need to meet either a minimum opening deposit or daily balance requirement. Aside from early withdrawal penalties, you probably won’t have to pay any fees for a CD. You may have to pay a smattering of fees for certain services on savings accounts, such as overdraft or wire transfer fees.
- Rates: High-yield savings accounts offer excellent interest rates, but the rates are variable. In other words, the APY can go up or down depending on macroeconomic conditions. CDs offer a guaranteed interest rate throughout the term, so you know exactly how much you will earn once the account matures.
How to choose where to put your money
Both high-yield savings accounts and CDs are great options if you’re interested in earning more interest than you would in a traditional checking or savings account. Which you should choose will depend on your financial goals and how soon you’ll need access to your funds.
Savings accounts are generally best for those who need to set aside money for a short-term goal or emergency fund. After all, you can’t predict when your car might break down or you’ll get a larger than expected medical bill, and you want to be able to access your money when you need it.
CDs, on the other hand, are a good option for people who know they won’t need to access a portion of their cash for a certain amount of time and want to earn as much interest as possible. They’re also great for growing money for a longer-term goal, like a car purchase or a down payment on a home, since they provide a more guaranteed return than the stock market.
In most cases, if you can afford it, you’ll want to put a portion of your money in each type of account: a high-yield savings account that you can access freely and a CD to guarantee longer-term growth.
Bottom line
Both CDs and savings accounts offer higher interest rates, but it’s important to be clear how you want your money to work for you before opening either type of account. If you want an account for storing your emergency fund, a savings account is where it’s at. If you want to earn a fixed interest rate and won’t need your cash for a while, a CD is a fine choice. Opening the right type of account ensures you can avoid facing unnecessary hassles with your money — and that your cash is working as hard for you as possible, even when it’s in the bank.
Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.
This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at lauren.williamson@hearst.com.
